March 3, 2009 / 9:10 AM / 10 years ago

Downturn to be deeper even than IMF forecast - OECD

PARIS (Reuters) - The global economic downturn will be considerably deeper than even the International Monetary Fund forecast a month ago, the Organisation for Economic Co-operation and Development’s chief economist Klaus Schmidt-Hebbel told Reuters.

The IMF nameplate is displayed on a wall at the headquarters during the World Bank/International Monetary Fund Spring Meetings in Washington in this April 11, 2008 file photo. REUTERS/Jonathan Ernst

Further substantial cuts in interest rates by the European Central Bank and Bank of England are totally justified, he said in an interview. These were to be expected in response to the worst spell the economy has suffered since 1946, when military spending plunged after World War Two.

“The recession will deepen...there’s no doubt,” he said. “I think this quarter will be the worst quarter of all.”

On Jan. 28, the IMF cut its forecast for global growth to 0.5 percent in 2009 from an earlier prediction of 2.2 percent. It also forecast a 2.0 percent slide in economic output from the world’s most advanced economies as a whole, an equally large downgrading of forecasts it had made in November 2008.

Even those drastic revisions failed to reflect the extent of the downturn at this stage, said Schmidt-Hebbel.

He is preparing new forecasts for publication at the end of March by the Paris-based OECD, which will be cutting its own predictions from those it made last November.

“The shape of it will be a significantly deeper recession than what was forecast by the IMF in January, at all levels,” said Schmidt-Hebbel. “(It will be) significantly deeper and more protracted — meaning longer than what is embodied in the IMF forecasts of late January.”

Last November, the OECD predicted a 0.4 percent decrease in aggregate economic output this year from its 30 member countries. These include all of the wealthy industrialised countries and a handful of less mature economies such as South Korea, Mexico and Turkey.

“The OECD economies will do significantly worse than the world economy because in emerging economy countries like the Indias, Chinas and some others, growth will still be slightly positive in 2009,” he said.

Schmidt-Hebbel said the current quarter would probably prove to be the worst one in the international downturn, after an already very bad final quarter of 2008 where U.S. output fell faster than in any quarter for 26 years.

The U.S. Federal Reserve has pushed official interest rates close to zero and Japan’s central bank is already at that point, though other central banks still have more leeway.

“We are expecting, and forecasting formally, significant further interest rate cuts by the Bank of England, the ECB and a number of other OECD countries with independent central banks, towards very low rates, which I think is absolutely justified by the outlook on inflation and activity for the next one or two years,” Schmidt-Hebbel said.

This would be what the OECD would say on rates when it published its new official forecasts at the end of March, he said.

Reuters polls show economists expect the ECB to cut its main euro zone rate by 50 basis points from the current 2.0 percent on Thursday and that the Bank of England too will lower its rate the same day from a current level of 1.0 percent

Schmidt-Hebbel said interest rate cuts had a limited power to support economic growth. That increased the need to consider less conventional moves, such as direct asset purchases, or “quantitative easing” of credit conditions along the lines being deployed in the United States and now Britain, he said.

Schmidt-Hebbel offered one relative note of optimism.

“Certainly, this will be the worst recession since 1946 ... but again this is not the Great Depression, when we saw GDP fall by 20 percent in some major economies from peak to trough.

Schmidt-Hebbel was presenting a new OECD report on Tuesday in which the OECD said the governments should pursue “double dividend” policies to address both the current crisis and the need for sustainable growth in the longer term.

Public investment in infrastructure should be deployed fast with a focus on areas such as school building, said the report. Money should be channelled towards retraining of workers for industries with a future and payroll taxes reduced for low earners in particular, it said.

Training auto sector workers so that they could move on from an industry condemned to contract was one example, Schmidt-Hebbel noted.

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