The contrast was stark: the Organisation for Economic Co-operation and Development revised its World Economic Outlook upwards for the first time in two years, its latest review concluding that the global economic slide is nearing a bottom.

In its report published overnight, the OECD lifted its growth forecast for 2009 for the 30-nation OECD area to a decline of 4.1%, down from a contraction of 4.3% forecast in March. Not much, but it’s a start. Australia is forecast to contract this year by 0.4% and grow by 1.2% in 2010; unemployment will rise to 7.7% next year from the current 5.7%, sharply under the 8.25% to 8.50% suggested in the budget and by other commentators. That makes us a stand-out economy.

But the European Central Bank injected a note of sobering reality: it revealed plans last night to pump $A900 billion into the European financial system in one year, to try and boost lending and keep the continent’s banks liquid and alive.

The ECB has pumped a record 442.2 billion euros into the Eurozone banking system in a first-ever offer of unlimited one-year funds. It topped the previous largest amount injected in a single ECB operation of 348.6 billion euros in December 2007 as the credit crunch deepened.

It was a very public admission that the Eurozone banks are so weak that they have nothing to lend to business and consumers and need to be supported for the next year while the economy steadies and hopefully starts growing. It’s an admission of the deep weakness still persisting in Europe, especially among its banks.

And then early today (at 4.15 am) the US Federal Reserve left its key interest unchanged, firmly ruling out any rate rise for the foreseeable future and emphasising that while the economy seemed to be steadying, it remained very weak.

A growing number of US analysts had been looking for the Fed to validate the economy’s progress by hinting at some sort of time line for a rate rise and an end to the quantitative easing which is pumping money into the country’s battered banking system.

Leaving interest rates steady at the current 0% to 0.25% is a sign that the Central Bank, while believing in green shoots, remains to be convinced about their longevity.

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period ,” The Fed said in its post meeting statement (my bolding).

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

This week has now seen the World Bank forecast a fall of 2.9% for the world, and a drop of 4.5% this year for what it called the developed economies (which cover all of the 30 OECD members for which the fall was 4.1%).

For 2010, the OECD now expects very modest growth where earlier it expected none. The World Bank saw something a touch stronger, but more for the world as a whole thanks to a stronger rebound in developing economies, such as China and India.

“OECD activity now looks to be approaching its nadir, following the deepest decline in post-war history,” the OECD said overnight. But the reality was expressed in the qualifying statement: “Recovery is likely to be weak and fragile, and the economic and social damage caused by the crisis will be long-lasting.”

“Yet, it could have been worse. Thanks to a strong economic policy effort an even darker scenario seems to have been avoided,” the OECD added.

The Organisation said that financial conditions are likely to remain constrained for some time and the actual bottom of the recession is will probably not be reached until the second half of this year.

Moreover, unemployment within the OECD will not peak until next year and that looks to be the major constraint in all OECD economies for some time to come.

But it says the risks to growth have become more balanced, thanks to massive policy intervention on the fiscal and monetary fronts and quick efforts to stabilise financial institutions. (All that criticised stimulus spending in the US, China, Japan, Australia, the UK and throughout Europe.)

The OECD said that growth appears to be under way in most non-OECD countries, especially China, and there are signs that the contraction in the US may be near the bottom as well as signals that Japan may be coming to the end of its trade-induced contraction.

The report cautions governments against sudden withdrawal of fiscal stimulus, a likely response given the build-up of apparently unsustainable levels of public borrowing. “However, it is necessary to balance concerns about fiscal sustainability with the need to avoid an overly rapid phase-out of fiscal support,” the report said.

So for all those fretters worrying about exit strategies and the inflationary impact of the huge stimulus packages now in place, they are wasting valuable energy. In fact what they should contemplate is what might happen if those stimulus packages are taken away. The OCED is warning us that taking the money away too soon might have catastrophic outcomes for the global economy.

Peter Fray

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Peter Fray
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