The advanced economies of the world will soon hit the bottom of the recession and have begun the long haul towards a weak recovery by the end of the year, the OECD said today as it revised up forecasts.
But it forecast that the Irish economy would shrink by almost 10% this year, the most pessimistic prediction so far. The body also expects a further fall of 1.5% next year.
Its economic outlook says the Irish economy is experiencing a 'severe' contraction, and will recover only at a slow pace in 2010.
The OECD says 'substantial' spending cuts and increases in tax will be needed in the coming years because of the severe pressure on the public finances.
'Problems in the banking sector must be resolved at a reasonable cost,' it adds. The OECD says competitiveness would be restored by lower wages and stronger competition.
Forecasts raises for first time in two years
The OECD said its 30 advanced economy members would now see growth of 0.7% next year, revising its March forecast for a contraction of 0.1% and putting the outcome close to 2008's expansion of 0.8%.
Saying this was the first time in 24 months that it had raised, instead of lowered its forecasts, the OECD said member states' combined economic output this year would shrink 4.1% rather than 4.3%.
'It looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom. Even if the subsequent recovery may be slow, such an outcome is a major achievement of economic policy,' it said in a regular review.
A massive fire-fighting effort by governments and central banks had pulled the world back from the brink of 'catastrophic events', it added.
The Paris-based OECD said it expected the US economy to contract 2.8% this year and grow 0.9% in 2009, with Japan down 6.8% before returning to growth of 0.7% in 2010. The euro zone would shrink 4.8% this year, with zero growth in 2010.
The OECD said that the financial sector remained under tension 'and the bottom of the recession is likely to be reached only in the second half of the current year, after which a weak recovery is projected.'
There were growing signs US activity could 'bottom out' in the next six months in response to 'tremendous' supportive measures and recovery seemed to be in motion in most big countries outside the OECD, notably China following a major stimulus package.
Japan also seemed to be close to the end of a sharp downturn but recovery there would be slow and a large amount of spare capacity ran the risk of causing deflation - a sustained period of falling prices.
In the euro zone, signs of recovery 'are not yet as clearly visible,' it said, however.
The OECD said massive intervention had contained the worst economic crisis for 65 years and further stabilisation of the financial sector could boost the chances for recovery.
The OECD said that among immediate dangers and uncertainties, there was the prospect of a substantial rise in unemployment, which would likely hit 10% in the US and more than 12% in the euro zone. This could add to the deflation risk and undercut household spending, a key driver in any economy.
It said that governments should do their utmost to keep interest rates exceptionally low, at close to zero, and continue to support the financial sector until recovery is underway, it said.
At the same time, the OECD noted that long-term interest rates, as determined by bond yields, would be under pressure to rise as governments issued more bonds to raise funds for stimulus packages and other measures.
'The economic crisis will cast a long shadow,' the OECD said, noting that economies would emerge from it with a lower potential for sustainable growth than they had before the crisis.
Europe would be particularly at risk from an increase in long-term, structural unemployment, it added. Against this backdrop, the withdrawal of supportive measures must not be unduly hasty.
