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OECD sees dropping inflation, rising unemployment

The number of unemployed in OECD countries is expected to rise by about 8 million people over the next two years as the most serious recession since the early 1980s takes its toll on economic activity, according to the latest OECD Economic Outlook.

Jobless numbers could rise to 42 million by 2010 from 34 million currently, while economic activity is expected to fall by an average of 0.4% in 2009, before rising slowly to 1.5% the following year.

Inflation, however, will ease in all OECD countries.

 “Uncertainties surrounding the projections are exceptionally large,” OECD Chief Economist Klaus Schmidt-Hebbel warned. “Much will depend on how quickly the financial crisis - the main driver of the downturn - is overcome”.

The Economic Outlook sees US output falling during the first half of next year, then gradually picking up as the effects of the credit squeeze abate, the housing downturn bottoms out and the impact of lower interest rates takes hold. Weak household spending due to large losses in households’ wealth will limit the strength of the recovery. US GDP is projected to fall 0.9% next year, before rising 1.6%cent in 2010.

Euro area activity is also expected to fall over the next six months as consumption and investment declines. A gradual recovery should then take hold in the wake of interest rate cuts and the easing of financial market turbulence. Euro area GDP is forecast to fall 0.6% in 2009 and climb 1.2% in 2010.

The downturn is expected to be severe in economies most vulnerable to the financial crisis or to sharp house price falls. These include Hungary, Iceland, Ireland, Luxembourg, Spain, Turkey and the UK.  

A brief growth spurt is expected in Japan in early 2009 due to a government budget stimulus, but output is set to stagnate over the second half of the year. There is a risk that deflation may return. Japan’s GDP will fall 0.1% in 2009 then rise by 0.6% in 2010, according to the Outlook.

The global slowdown will also affect the major emerging-market economies such as China, Brazil, Russia and India. Here, however, the downturn will be from high growth levels.

 “Against the backdrop of a deep economic downturn, fiscal policy stimulus has an important role to play,” Schmidt-Hebbel said.

Writing in the Economic Outlook, Schmidt-Hebbel said concerted efforts to stabilize financial markets appear to be working, but governments must also be ready to expand them if the need arises. Such support should be limited to firms that are of systemic importance. He added that the global scale of the financial crisis underlines the necessity for international cooperation to avoid measures that distort competition or effectively shift the problem to other countries. (press release)