Recession Could Last Long Into 2010

The recession in the industrialised world will be longer and deeper than forecast so far and could spread to emerging economies such as China and India, the OECD and European commission warned today.

Klaus Schmidt-Hebbel, OECD chief economist, and Marco Buti, European commission director-general of economic affairs, both indicated that the projected recovery could be postponed until later in 2010.

Buti said the next commission forecasts for the EU and eurozone economies, to be published a month earlier than planned in January, would be significantly worse than those drawn up a few weeks ago.

Schmidt-Hebbel told a European Policy Centre conference the OECD would now change its forecast of just two weeks ago and extend the projected recession by at least a quarter, with unemployment peaking in 2010-11. The OECD is so far forecasting a rise of 8 million unemployed to 42 million in its area.

Their gloomy readings of global economic forecasts came as a leading German forecaster, the RWI institute, said Europe's biggest economy would contract by 2% in 2009 ? the worst recession since 1949. France's industrial output collapsed by a record 7.2% last month.

Buti effectively cast serious doubt on claims by commission president Jos? Manuel Barroso that the proposed ?200bn (?175bn) stimulus package would make the recession "shorter and shallower" than forecast.

Questioning OECD estimates of a slow recovery beginning from the third quarter of 2009, he said: "In spite of the unprecedented macroeconomic boost the risks for 2010 are firmly to the downside and the risk that the economy will not restart in earnest then are strong. I would hope to be proved wrong."

The commission forecast in late October that the eurozone would come to a standstill in 2009, with the EU economy growing by just 0.1%, but Buti tore this up. "My reading is that the risks of a longer-lasting recession are clear and present."

Schmidt-Hebbel, who has forecast a gradual recovery in the 30-strong OECD from the third quarter of next year and a return to potential growth in the final quarter of 2010, said one silver lining was the decline in food and energy prices.

Another was the likelihood that central banks, led by the US Federal Reserve which is expected to cut rates to 0.5% next week, would further ease monetary policy. But the impact of cuts to near-zero could take longer than usual to feed through.

As China reported the first drop in its exports for seven years, he also indicated a "small" likelihood that both it and India could experience negative growth as global trade slows down. But he added: "This will not be a great depression."