GREG WOOD
The Organization for Economic Co-operation and Development says the global recession is easing but urged policymakers to remain vigilant through weak recovery.
Specifically, the 30-member organization called on Canada and Britain to keep their benchmark interest rates at current low levels until the end of 2010, going beyond Bank of Canada Governor Mark Carney's pledge to keep the overnight rate at 0.25 per cent until June of 2010.
The U.S. and Japanese central banks, the group said, should go even further, keeping rates at current levels into 2011.
In its latest economic outlook, the Paris-based OECD predicts that the combined economies of its 30 members will expand 0.7 per cent in 2010, a meager result, but much better than the 0.1 per cent contraction predicted in March.
It was the first upward revision in the OECD's forecast in two years.
The OECD used the report to urge finance ministers and central bankers to keep their stimulus measures in place until a rebound is clearly underway.
In terms of government spending, some countries have spent all they can afford. Others, including Canada, are in a position to boost spending and should do so if their downturns persist, the OECD said.
"This is no time to relax," Jorgen Elmeskov, acting head of the economics department, wrote in the report released Wednesday. "Ensuring that the recovery stays on track and leads towards a long-term sustainable growth path will call for major policy efforts going forward."
The United States will lead the rebound with an expansion of 0.9 per cent next year, compared with an earlier estimate for no growth in 2010. Canada's gross domestic product will expand by 0.7 per cent next year, an improvement over the March estimate of 0.3 per cent.
"It looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom," Mr. Elmeskov wrote. "Even if the subsequent recovery may be slow such an outcome is a major achievement of economic policy."
The world's industrial economies are getting a lift from government stimulus spending, low interest rates, and a flood of money from major central banks such as the U.S. Federal Reserve and Bank of Japan.
World trade is showing signs of life because big emerging markets such as China, India and Brazil already have shaken off the effects of the financial crisis, the OECD said. That's boosting the confidence of businesses, which have realigned inventories with demand and are now poised to slowly resume production, the report said.
To be sure, the rebound that the OECD describes is weak by historical standards and remains extremely fragile. The GDP of OECD members will shrink 4.1 per cent this year, which is only marginally better than the previous estimate for a 4.3 per cent contraction.
The early signs of growth could be nipped by any number of factors, including a faster increase in bond yields brought on by investors nervous that all the government stimulus measures will lead to rapid inflation.
"If there's such a thing as a growthless recovery, this is it," Bank of Nova Scotia economists said in a research note, referring to the forecast for the U.S. economy next year.
The report shows the depth and extent of the economic contraction. World trade will collapse by one-sixth, or 16 per cent, in 2009, and is only expected to be back in positive figures by the end of the year, around the same time OECD countries are expected to come out of the recession.
And employment gains will lag further. The average unemployment rate in the 30 member economies is projected to rise from 5.9 per cent in 2008 to 8.5 per cent this year and 9.8 per cent in 2010. Canada's rate is expected to track the average, going from 6.1 per cent in 2008 to 8.6 per cent in 2009 and 9.8 per cent in 2010.
The OECD's upgrade for the United States is matched with a rosier outlook for Japan, which will post 0.7 per cent growth in 2010 after an economic collapse of 6.8 per cent this year.
Like America, Japan's economy is being saved by massive government spending, the report said.
In Canada, "recessionary conditions" likely will linger into the third quarter, with "only a slow recovery thereafter" as unemployment continues to rise into early 2010, the report said.
"The federal government has not closed the door to doing more, should economic conditions warrant, and given its relatively strong fiscal position it retains the room to do so," the report said.
Economic outlooks from institutions such as the OECD and the International Monetary Fund are taking on greater significance as investors struggle to assess when the worst of the global recession will pass.
On Monday, the World Bank said the global economy would shrink 2.9 per cent this year, the first contraction since the Second World War and deeper than it predicted earlier this year. The revision contributed to a sharp selloff in stock markets around the world.
The OECD's forecast for Canada next year compares with the Bank of Canada's estimate for growth of 2.5 per cent. The two estimates aren't comparable because the OECD and the Bank of Canada use different methodology in their forecasting.