OECD: Global recession ending

The recovery may even prove a little stronger than previously predicted, OECD chief economist Jorgen Elmeskov told Reuters in an interview where he elaborated on the forecasts for several key economies. "Compared with expectations a few months ago, we now have a recovery which ... may be coming a little earlier and it may be slightly stronger because financial conditions have improved more rapidly than we assumed a few months ago," Elmeskov said.

The OECD forecasts show a third-quarter return to expansion of economic output, as measured by gross domestic product, in the United States and the 16-country euro zone, led by its two largest economies, Germany and France. The forecasts showed an annualized expansion of 1.6 percent in the United States in the third quarter, 0.3 percent in the euro zone and 1.1 percent in Japan, and were generally more optimistic than the last update in June. The pickup that started with a "quite dramatic turnaround" in China and other Asian emerging market economies in the second quarter remained heavily dependent on government stimulus and ultra-low interest rates across the world, Elmeskov said. The OECD's 30 member countries do not include rising powers such as China but do include the long-industrialized ones where the trouble began in 2007 as the credit and housing boom in the United States turned to bust, triggering a crisis in banking and financial markets that infected the real economy.

Turning point for G7

While it predicted continued third-quarter contractions in Britain and Italy, and a rise followed by a fourth-quarter dip for Japan, the OECD said the broad picture for the G7 group of industrialized powers was better. The forecasts, including information up to Sept. 2, show the euro area turning positive in both of the last two quarters of 2009 after five straight quarters of contraction. In June, it predicted quarter-on-quarter shrinkage of 1.1 and 0.5 percent respectively in the third and fourth quarters on an annualized basis. It now expects 2 percent growth in the fourth quarter. The previous forecasts for the United States had been zero and 0.5 percent -- now upped to 1.6 percent and 2.4 percent respectively.

The OECD is still predicting GDP contractions for 2009 as a whole across the G7 group, primarily because of a particularly bad first half, despite the improvement now in the pipeline. But it sees annualized GDP rises of 1.2 and 1.4 percent in the third and fourth quarters for the G7 as a whole, also signaling an exit from recession at that level. "In some countries including the United States it also looks as if the bottom of the housing market might have been hit a little earlier than assumed," Elmeskov said, noting a rise in house sales and a drop in the "overhang" of unsold homes.

Don’t pull the plug yet

The OECD forecasts came on the eve of a meeting of finance ministers from the G20 group, which spans the big up-and-coming economies such as China and India in addition to the G7 members. The report said that while authorities needed to map out a strategy for withdrawal of fiscal and monetary stimulus once recovery was surer, now was no time to take the economy off life support, either in terms of government spending or shifts to higher official interest rates. "Substantial slack combined with the prospect for a weak recovery implies that strong policy stimulus will continue to be needed in the near term," it said.

"Regarding monetary policy, taking the first steps towards normalization of policy interest rates from their current exceptionally low levels should in most cases wait until well into 2010 and in some cases even beyond," the OECD said. Back in June, the OECD said interest rates should stay on hold in all major economies through all of 2010. Elmeskov acknowledged that this recommendation was no longer quite so categorical but said the bottom line was that rates needed to stay very low in the euro zone, United States and beyond for the large part of next year.

As for fiscal stimulus, governments needed to roll out all of the measures they had already announced after foot-dragging by some, said Elmeskov. That, one OECD official said, referred mainly to Germany and the United States.