OECD: Global Economic Recovery to Start Sooner Than Expected, but Caution Remains

The worst global recession since World War II is ending faster than previously thought, but the recovery will still be a slow one, the Organization for Economic Cooperation and Development (OECD) said today (Thursday).

For the combined economy across the Group of Seven (G7) nations, the OECD expects a contraction of 3.7% this year, down from the 4.1% drop it projected in June. Still, the organization sees ample spare production capacity, low levels of profitability, rising unemployment and “anemic” growth in incomes will keep an uptick in consumer demand in check, and it says the need remains high for businesses and governments to repair the damage incurred during the recession.

“We clearly have a recovery at hand that seems to have materialized a little earlier than we expected,” OECD acting chief economist Jorgen Elmeskov said in an interview with Bloomberg News. “There’s still a lot of caution about the recovery as there are some quite significant headwinds.”

Annualized quarter-on-quarter growth in the United States will be 1.6% in the third quarter, 1.1% in Japan, and 0.3% in the Eurozone, the OECD estimates. Three G7 nations will see contraction: The United Kingdom will decline 1%, Italy 1.1% and Canada 2%.

“Substantial slack combined with the prospect for a weak recovery, implies that strong policy stimulus will continue to be needed in the near term,” the OECD warned, adding that central banks’ policy of exceptionally low interest rates shouldn’t be raised until 2010 and possibly beyond.

“The numbers wouldn’t have looked this good if it hadn’t been for the stimulus both from governments and from monetary policy undertaken by central banks,” Elmeskov told Dow Jones Newswires.

The OECD said policy makers should prepare “exit strategies” for the removal of monetary stimulus. The timing of these strategies will be discussed at the two-day Group of 20 meeting in Pittsburgh, which begins today (Friday).

“At some point central banks will need to move back to normality, but not anytime soon,” Elmeskov said. “When, down the line, inflationary pressures are back they want to be able to move into restrictive territory, and they don’t want to have to move all the way from low rates.”

In Japan, where voters just delivered a landslide victory to the opposition after 54 years of near-single-party rule, interest rates will need to be kept at an “extremely low level” for “quite some time,” Elmeskov said. Japan’s economy for the year is expected to contract by 5.6%, compared to the 2.8% decline expected in the United States.

While the OECD is optimistic unemployment will ease, it made no mention of the possibility of a jobless recovery, where companies make up for profits lost in the recession by keeping their headcounts low for an extended period of time.

The news from the OECD comes at the same time the minutes of an Aug. 11-12 meeting of the Federal Open Market Committee (FOMC) revealed that it is trying to prepare investors for an end of its purchases of mortgage-backed securities while keeping interest rates near zero. In the meeting, the FOMC said that gradually slowing the pace at which it buys Treasury securities and extending their completion to the end of October could “help promote a smooth transition in markets.”

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