Recovery in developed economies gathering pace

AP News
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Posted: Nov 19, 2009 8:55 AM

Recovery in developed economies will accelerate next year due to "substantial improvements" in financial markets and fast-growing Asian countries, but is likely to remain fragile, the Organization for Economic Cooperation and Development said Thursday as it doubled its 2010 growth forecast.

The Paris-based watchdog's chief economist, Jorgen Elmeskov, told a news conference that the recovery has been mostly driven by government stimulus measures and interest rate cuts. Those benefited financial markets, whose recovery is "considerably faster and stronger" than anticipated in the June economic outlook, he said.

Still, the recovery will remain modest next year, with the U.S. and Japan outpacing Europe, the OECD report said.

Elmeskov warned banks not to use the "fat margins" they have accrued thanks to government policies designed to keep money flowing to the real economy to line their own pockets.

He said the margins "are the result of both weak competition in the sector and public policy interventions."

"It is important that these fat margins do not just end up as higher bonuses, dividends or buybacks."

While banks have started to loosen lending conditions _ a vital condition for the economy to grow again _ there are still some concerns about the health of their balance sheets and their ability to provide credit to fund the economy, he said.

The OECD more than doubled its estimate for 2010 growth in its 30 member countries _ which include the U.S., Japan, Germany and the United Kingdom _ to 1.9 percent, compared with 0.7 percent forecast in June.

The projections are based on the assumption that by the middle of next year, financial conditions will have returned to normal.

The OECD publishes its economic outlook twice a year, although it updated some 2009 forecasts in an interim assessment published in September.

The U.S. economy has been boosted by stimulus measures, improving financial conditions, demand from the fast-growing non-OECD economies of Asia _ especially China _ and the stabilization of the housing market, the OECD said. It predicted unemployment will start to ease after peaking in the first half of 2010.

The OECD predicts the U.S. economy will expand at a rate of 2.5 percent in 2010, up from a June forecast of 0.9 percent. It also expects a smaller contraction this year: a 2.5 percent fall in output compared with an interim September forecast of a 2.8 percent drop.

In Europe, the economies of the 16 countries sharing the euro are now expected to grow by 0.9 percent next year compared to a June forecast of zero growth. However, the OECD predicts a greater contraction of 4 percent this year, more than the 3.9 percent it calculated in September.

Unemployment is not set to peak before the end of 2010 or the beginning of 2011, and is likely to sap the strength of recovery, the OECD said.

Japan's economy will grow by 1.8 percent next year compared with the June forecast of 0.7 percent. The OECD reduced prediction for a contraction this year to 5.3 percent compared to a 5.6 percent rate seen in September.

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Elmeskov said central banks should keep interest rates low and should beware of the dangers of deflation, while governments should work on plans to reduce debt levels as the economy recovers.

As growth picks up, policy makers will need to mop up some of the excess liquidity caused by policies designed to keep credit markets open when they threatened to freeze during the peak of the crisis.

The OECD suggests phasing out banks' use of funding guarantee schemes by making them more expensive rather than ending them, to avoid having to reintroduce them in case of renewed instability, which could undermine confidence.

International coordination will be needed to roll back extended deposit insurance "as few countries may be willing to move ahead alone with a measure that could weaken the competitiveness of domestic banks," it said.

The OECD also published a study of the auto industry, another recipient of big government handouts. It said that a rebound in car sales is likely in North America, Japan and the United Kingdom, but should weaken in Germany, where the cash for clunkers scheme has pushed sales significantly above trend.