A glimmer of hope...

In recent months we have been bombarded with a spate of bad or negative economic news as the fallout from the global financial crisis became real. Now today The Organisation for Economic Co-operation and Development (OECD) has revised its World Economic Outlook upwards for the first time in two years and concludes that the global economic downturn is nearing a bottom.

Financial Times reported as follows:

In its report the OECD revised its growth forecast for 2009 to a decline of 4.1 per cent, down from a contraction of 4.3 per cent. It said that in 2010, it expects very modest growth where earlier it expected none.

“OECD activity now looks to be approaching its nadir, following the deepest decline in post-war history,” the report said, adding caveats that the recovery is “likely to be both weak and fragile for some time”. Moreover, it warned that the negative economic and social consequences of the crisis would be long-lasting.

“Yet, it could have been worse. Thanks to a strong economic policy effort an even darker scenario seems to have been avoided,” the OECD concluded.

Equally, financial conditions are likely to remain constrained for some time and the actual bottom of the recession is will probably not be reached until the second half of this year. Moreover, unemployment within the OECD will not peak until next year.

However, the OECD said the risks to growth have become more balanced, thanks to massive policy intervention on the fiscal and monetary fronts and quick efforts to stabilise financial institutions.

Already, growth appears to be under way in most non-OECD countries, especially China. There are also signs that the contraction in the US may be near the bottom as well as signals that Japan may be coming to the end of its trade-induced contraction.

The report cautions governments against sudden withdrawal of fiscal stimulus, a likely response given the build-up of apparently unsustainable levels of public borrowing. “However, it is necessary to balance concerns about fiscal sustainability with the need to avoid an overly rapid phase-out of fiscal support,” the report said.

It noted that some countries including Germany, Canada and some Nordic countries may have scope to increase fiscal stimulus because they have relatively low levels of debt. But Japan, Italy, Greece, Iceland and Ireland have no such leeway.

The drag on output from the sharp fall in housing activity across all economies should peak this year and house prices are falling in all OECD countries for which there is data, except Switzerland, the report noted. The report pointed to evidence across the OECD that the contraction phase of past house price cycles is typically five years, and that the drag on consumption from falling housing values are likely to be most marked in countries where the ability to extract cash from a rise in house prices was greatest.

Meanwhile, the fall in world trade seems to have moderated after the collapse in the fourth quarter of 2008 and first quarter of 2009. Nonetheless, OECD exports and imports have most likely been falling at double-digit rates in the second quarter, the decline being less pronounced for the non-OECD area.

For 2009, world trade, in real terms including non-OECD states, is expected to contract by 26 per cent and recover modestly in 2010 to expand by 2 per cent.