Recession Will Be Longer and Deeper Than Previously Thought, Says Oecd

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

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

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

Schmidt-Hebbel told a European Policy Center conference that the OECD would change its forecast of just two weeks ago and extend its estimate of the duration of the recession by at least a quarter, with unemployment peaking in 2010-11. The OECD has been forecasting a rise of 8 million in the number of unemployed to 42 million among its members.

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

Buti in effect cast serious doubt on claims by the EC president, José Manuel Barroso, that the proposed €200bn (£173bn) stimulus package would make the recession "shorter and shallower".

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 EC 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 bright spot 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 rate cuts to near-zero could take longer than usual to feed through.

As China reported the first drop in its exports for seven years, Schmidt-Hebbel suggested a "small" likelihood that it and India could experience negative growth as global trade slows. But he added: "This will not be the Great Depression."