OECD: WORST OVER FOR THE ECONOMY
Stimulatory government policies and improving financial conditions meant the Paris-based think tank revised its forecasts upwards for the first time since June 2007, predicting that GDP would shrink by 4.1 per cent in 2009 in the OECD area, before expanding by 0.7 per cent next year. But the think tank revised down its outlook for the UK.
A prompt fiscal stimulus from the incoming Obama administration and improvements in the bigger developing countries were behind the more optimistic forecasts of a fragile recovery in 2010 for the OECD area.
And the OECD stressed it would be wrong for countries to relax the extraordinary policy effort of the past nine months, however tempting, because policy can still do more to ensure a faster and robust recovery.
But Britain’s monetary and fiscal stimulus has not been enough for the OECD to see as optimistic an outlook for the UK.
It said Britain’s economy will contract by 4.3 per cent in 2009, its fastest pace of decline since the Second World War, and stagnate in 2010.
In March, the think tank forecast British GDP would contract 3.7 per cent this year. But it has revised its 2010 forecast upwards to unchanged rather than a 0.2 per cent contraction.
“Continued financial sector weakness, further declines in house prices, a weak global economy and sluggish income growth are projected to depress output through 2009, as in most OECD countries,” the OECD said.
While supportive of the monetary easing and fiscal stimulus undertaken by the UK, the OECD added: “To improve stability, the government should continue to develop a concrete and comprehensive plan to ensure that debt is on a declining path once recovery takes hold.”
It forecasts UK public debt rising to 14 per cent of GDP, curtailing the possibilities for further fiscal stimulus and warned that the effectiveness of further quantitative easing remains uncertain.
Meanwhile, the US Federal Reserve kept its benchmark interest rate unchanged at between zero and 0.25 per cent, saying that economic activity would “remain weak for a time”.