Government policies will avert economic collapse: OECD report

A forecast released by the Organization for Economic Co-operation and Development on Tuesday indicates its members' economies will shrink by 4.3 per cent this year.

Klaus Schmidt-Hebbel, chief economist for the OECD, slashed forecasts for growth in the 30 rich countries that make up the group's membership, predicting the economies will shrink by 4.3 per cent this year, and by 0.1 per cent next year.

The new forecasts released Tuesday compare with a November forecast that the OECD economy would shrink by 0.4 per cent this year and grow by 1.5 percent in 2010.

The decline could have been much worse without government stimulus plans, according to the Paris-based organization.

Global leaders have steered the world away from a 1930s-style Great Depression by a "very, very, high level of awareness" of previous policy errors, said Schmidt-Hebbel.

"We would be looking into a Great Depression-like scenario if we had done the same policy mistakes which were done in the 1930s," he said.

Schmidt-Hebbel said governments have mostly avoided the protectionist urges that raged in the 1930s, helping convert a recession into the worst economic quagmire in human memory.

The forecast was released the day before members of the Group of 20 begin meetings in London.

The OECD predicts a "policy-induced recovery" will start to pull the global economy out of recession in 2010.

But the forecast notes that unemployment in the G7 could still reach up to 36 million by late 2010.

European countries are expected to emphasize a toughened regulatory system for global finance at the G20 meetings, while the U.S. has urged more spending.

The priority for the G20 should be to fix banks by removing toxic assets — such as securities for which markets have dried up amid the financial crisis — from their balance sheets and by getting banks more capital, the OECD said.

Schmidt-Hebbel said U.S. President Barack Obama's plan to rid banks of toxic assets by using private and public money, announced after the report was written, "makes a lot of sense," though he questions whether there are sufficient funds or private sector interest for the plan to succeed.

The OECD study suggests that three years of stimulus measures until 2010 add up to 5.6 per cent of 2008 gross domestic product in the United States, compared with three per cent in Germany, 0.6 per cent in France, 1.4 per cent in Britain and two per cent in Japan.