OECD Upgrades Report
by Hiland Doolittle
The Paris-based Organization for Economic Cooperation and Development (OECD) was founded in 1961 with a mission statement to coordinate international economic policies. The OECD has 30 member nations. The organization has never been more challenged than in the current recession.
On Wednesday the OECD raised its economic forecast for the first time in two years. The announcement was in sharp contrast to an early week release from the World Bank stating that the global recession will be deeper than predicted in its report three months earlier.
The OECD report provided projections that the combined economy of the world’s most industrialized nations will contract 4.1 percent this year before growing 0.7 percent in 2010. March forecasts indicated a 2009 contraction of 4.3 percent with a 2010 increase of 0.1 percent.
The OECD report was accompanied by strong recommendations that the Federal Reserve and the Bank of Japan should sustain current interest rates until 2011. The organization also recommended that the European Central Bank (ECB) reduce its current rate.
The OECD report is strongly based upon the consensus that the U.S. economy will contract 2.8 percent this year and bottom in the second half of 2009 before beginning to grow in 2010. The group now predicts an expansion of 0. 9 percent. March projections called for a decline of 4 percent in 2009 and zero growth in 2010.
OECD chief economist Jorgen Elmeskov suggested the Federal Reserve would not need to raise its key interest rate until 2011. OECD Secretary General Angel Gurria declared, “Economic activity in the OECD countries is reaching bottom. We foresee a recovery that will be rather slow and fragile for some time.”
U.S. to Bottom this Year
Gurria urged the Obama Administration to move forward with their public-private partnership plan to rid the toxic assets from bank balance sheets. The group ominously warned that the Federal Reserve might have to be more aggressive than originally anticipated. OECD advised that the Fed might well have to purchase longer-term U.S. Treasury securities.
The report reflected continuing turmoil in the U.S. labor market and a resulting negative projection in consumer spending. While the housing market seems to be bottoming, the market remains over-supplied and with high unemployment and tight credit, consumers are cautious.
The OECD report said, “Restoration of trust in financial intermediaries and markets is vital for a sustained and strong economic recovery to occur.”
Canada’s Conservative Lending Stabilized Banks
The OECD report indicated that Canada would remain in the recession through the third quarter 2009 and then begin a fragile recovery. Canadian GDP will shrink 2.6 percent in 2009 and grow 0.7 percent in 2010.
“Reasons for their strength include a more conservative lending and borrowing culture, less opportunity for regulatory arbitrage and a more conventional mortgage market with fewer sub prime loans and little securitization.” Unlike most economies, bank balance sheets have stayed relatively healthy and remained profitable.
ECB Under Pressure
OECD report pressured the European Central bank to lower rates to near zero and warned the bank to expect to expect to stay at the low levels until the end of 2010. The Bank of Japan was encouraged to keep rates at 0.1 percent into 2011.
The current rise in bond market yields was anticipated but the OECD warned that further hikes could be detrimental. “What we are worried about would be further rises in the bond yields which could risk the recovery,” said Elmeskov, who said currencies were no longer a point of concern for the near future.
“We had a world financial crisis and there were limited effects on exchange rates except for the appreciation of the Japanese yen.” OECVD was unconcerned with a weaker dollar, but did express concern about the price of oil. The OECD model is based on oil at $50-$55 per barrel.
TARP Chief Moving Ahead
In a timely report, Troubled Asset Relief Program chief, Herb Allison, told the Congressional Oversight Panel that the government’s $700 million bank bailout fund was nearly ready to launch its private-public partnerships to buy toxic assets from the banks. Allison said the U.S. economy appeared to be on the mend but emphasized the need to press ahead with initiatives.
“Our financial system and our economy remain vulnerable, with unemployment still rising, house prices falling and pressure on commercial real estate continuing to build,” Allison told the panel.
30 companies that received cash infusions have repaid more than $70 billion to the government. An additional $5 billion in dividends from government investments has been received.
The private-public partnerships are designed to allow private investors to partner with the government fro the purpose of purchasing poorly performing mortgages and other assets that will be sold at a later date at a profit.
Allison told the Congressional panel that the details of the first offering would soon be released. Allison and OECD seem to agree that the launching of this program is critical to the global recovery.
Tags: 2009 Stimulus Package, ECB, Economy, Euro, European Central Bank, GDP, housing, OECD, recession, Stimulus Plan, US Dollar, US GDP, US Unemployment
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
