The Organization for Economic Cooperation and Development said Thursday that the global recession is ending a bit earlier than expected, but the recovery will likely be a weak one, keeping monetary policy loose for the time being.

“Recovery from the global recession is likely to arrive earlier than had been expected a few months ago but the pace of activity will remain weak well into next year,” according the OECD’s latest Interim Economic Assessment.

The OECD now forecasts economic growth across the G7 countries will fall by 3.7% this year, which is an improvement from the 4.1% drop projected in June. The latest GDP forecasts for this year provide slightly improved outlooks for Japan and the Euro area, an unchanged overall projection for the US but point to a gloomier situation in the UK, the OECD notes.

The report observes that the economic news has been mostly favourable over the past few months, and financial market conditions have improved too, including: cheaper money market funding, narrower corporate bond spreads, a rebound in equity markets and a moderation in the tightening of bank lending standards. “Nonetheless, bank lending continues to decline and concerns about the health of the banking system remain,” it says.

It adds that the inventory adjustment has progressed and global trade appears to have reached a trough, and is poised to accelerate as the economic recovery gathers strength. “Given the positive economic news and based on incoming high-frequency indicators, OECD short-term forecasting models point to an earlier recovery than envisaged a few months ago,” it says. “As a consequence, the unprecedented rate of deterioration in labour market conditions witnessed over the past year should ease.”

“Nonetheless, numerous headwinds imply that the pace of the recovery is likely to be modest for some time to come,” it cautions. “Ample spare capacity, low levels of profitability, high and rising unemployment, anaemic growth in labour income and ongoing housing market corrections will moderate any uptick in private demand. At the same time, the need remains for households, businesses, financial institutions and governments to repair the damage to their balance sheets.”

The OECD adds that the substantial slack combined with the prospect for a weak recovery, implies that strong policy stimulus will continue to be needed in the near term. It predicts that the first steps towards normalisation of policy interest rates from their current exceptionally low levels will likely wait until well into 2010 and in some cases even beyond.

On fiscal policy, it maintains that it is important that announced stimulus measures are implemented promptly. However, it adds that the possibility of a recovery taking hold sooner than anticipated “diminishes the likelihood that further fiscal stimulus will be needed in those countries having scope for such action”.

“Looking further ahead, OECD countries need to prepare for the removal of the exceptional degree of support afforded by current monetary and fiscal policy stances. In this regard, preparing credible exit strategies and fiscal consolidation plans now, even if actual implementation will only commence later, is desirable,” it adds.

IE