Reports

The OECD economy is recovering

(OECD)
Updated: 2009-11-26 16:12

Growth in the OECD area has resumed after the most virulent recession in decades, which is accompanied by the economic environment's improving, according to OECD's Economic Outlook NO. 86. （Full report）

The recovery is driven by exceptionally strong demand-supporting policy measures, public interventions in financial markets, a strong pick-up in demand in the non-OECD area and a positive contribution from inventory adjustment.

After a highly stressed beginning of the year, financial market developments have been favourable in many areas, driven by ongoing policy support for the financial system.

Banks in most countries have been strengthening their balance sheets.In the United States, the ratio of common equity to tangible assets of banks increased from its low of 3.7% at the end of 2008 to 5% at the end of the second quarter of 2009.

Besides the financial market's reviving, other factors acting on OECD economies, support the recovery. World trade growth has now begun to recover and the trade and the trade rebound has now spread to all regions, reflecting the broader recovery in output growth. Housing markets are laso showing signs of turning in some countries, reflected by the house rising in Australia, Norway and Switzerland.

Notwithstanding the support to growth in the coming two years,the growth will be moderate.Growth resumed in the OECD economy in the third quarter of 2009 and is set to gather pace gradually over the next two years, on the basis of financial conditions continuing to normalise as assumed, and policy stimulus being withdrawn in a very gradual manner.

With only a modest recovery in prospect, the OECD-wide unemployment rate is projected to continue to rise until the end of next year. By the end of 2010, the number of unemployed persons in the OECD economies will be almost 21 million higher than at the end of 2007.

With the economic recovery only just getting underway, the risks around the forecast are considerable, although broadly balanced. These risks include macroeconomic policy mistake, financial risks and uncertainty about the speed of balance sheet repair etc.

Respond policy shoulbe be interlinked. In an environment in which inflation is already low and likely to continue to weaken for some time, policy interest rates will need to be kept close to zero well into 2010 and will remain low for a time thereafter. This places limits on the extent to which traditional monetary policy can compensate for a rapid unwinding of the stimulus provided by fiscal policy and unconventional monetary policies, especially as actions to tighten policies in one country will affect other.

On the money policy, interest rate normalisation should depend on the extent of economic slack and strength of the projected recovery and the prospects for inflation. Unconventional measures need to be withdrawn as the recovery takes hold with some of the facilities contracting automatically and others involving a decision to sell accumulated assets.

On the financial policy,future tasks in this area are to scale back emergency measures as financial markets normalise, address problem assets on banks' balance sheets and reform financial regulation. It should continue pay efforts on removing government guarantees, dealing with problems assets and reforming financial systems.

On the fiscal policy, the OECD area-wide fiscal deficit is projected to peak at a post-war high of 8¼ per cent of GDP in 2010, three quarters of which is estimated -- with a large margin of error in current circumstances -- to be structural. Fiscal consolidation should begin when the recovery is solid.