OECD Forecast Highlights

(OECD via The Globe & Mail)

Canada

• The contraction that began in the last quarter of 2008 seems to have ended in the second half of 2009. External demand and domestic investment now appear to be rebounding, but they also pose the greatest risks to the recovery’s sustainability.

• Unemployment is projected to keep rising until the end of 2009 and underlying disinflation to continue for several more quarters under the weight of persistent slack.

• The Bank of Canada should hold the policy rate at its current near-zero level until the end of June 2010, as it has committed, and probably beyond.

• Given the time required to roll out fiscal stimulus and the nascent recovery, additional expansionary measures, including extending the window of eligibility for extraordinary unemployment benefits, should be resisted. Instead, governments should be preparing detailed and credible medium-term fiscal consolidation plans to be announced soon and be implemented when the recovery is firmly underway.

Non-OECD countries

• The upturn in the major non-OECD countries, especially in Asia and particularly in China, is now a well established source of strength for the more feeble OECD recovery.

• The strength of the upturn reflects both the limited direct exposure to the financial origins of the crisis and the strong policy stimulus these countries were in a position to apply.

• The major policy issue in many of these countries is now becoming one of withdrawal of stimulus so as to avoid igniting asset or general price inflation.

United States

• The U.S. economy is recovering on the back of policy stimulus, improving financial conditions, non-OECD demand growth, normalisation of stockbuilding and stabilisation of the housing market.

• With rapid labour shedding in the downturn, employment should respond quickly to economic activity and unemployment may peak in the first half of 2010.

Euro Area

• The euro area economy will benefit from many of the same growth-drivers as the United States.

• But work-sharing schemes which cushioned employment in the downturn may also weaken the employment intensity of growth going forward.

• With unemployment not set to peak before the end of 2010 or the beginning of 2011, household confidence is likely to be weak and sap the strength of the recovery.

Japan

• Japan is well positioned to benefit from strong growth in the rest of Asia but, fiscal stimulus notwithstanding, weakness on the domestic side will remain a drag on growth.

• With activity insufficient to materially reduce unemployment, deflation is set to linger.

OECD Economic Outlook No. 86, November 2009: Country summaries and a special chapter on the Automobile industry are on the OECD website.