Worldwide economic activity is expected to contract by 2.7% this year, the Organization for Economic Co-operation and Development said Tuesday.

Countries that are part of the OECD are expected to lead the slide, with a 4.3% contraction forecast for them in 2009. International trade is forecast to fall by more than 13% in 2009, it said. “The global recession will worsen this year before a policy-induced recovery gradually builds momentum through 2010,” the group says in its interim economic outlook.

In the United States, the OECD predicts that activity will fall sharply in the near term, “but the country could begin to pull out of the recession in early 2010, assuming the effectiveness of strong stimulus packages and more stable financial and housing markets.” GDP is forecast to fall 4% in 2009 then remain unchanged next year. For Canada, it sees a 3% GDP decline this year, followed by a modest 0.3% rise next year.

Japan’s economic output is projected to fall by 6.6% this year “as shrinking export markets more than offset policies to encourage domestic spending. Deflation will return as spare capacity puts downward pressure on prices,” it says.

“Weak export markets, falling investment and a continuing credit crunch will hit Euro area activity hard over the coming six months. The recovery will only begin to build momentum by the middle of 2010,” the OECD says. GDP is projected to drop 4.1% in 2009 and by 0.3% next year.

In the large emerging economies activity is slowing as access to international credit dries up, commodity prices fall and export demand weakens, it adds. Brazil’s GDP is expected to decline by 0.3% in 2009. Russia’s is projected to fall 5.6%. Meanwhile, growth in India will ease back to 4.3%, and in China to 6.3%, this year.

The report adds that the risks of an even gloomier scenario outweigh the possibility of a quicker recovery. “The most important risk is that the weakening real economy will further undermine the health of financial institutions, which in turn deepens the slump in economic activity,” it says.

It recommends that countries that can manage it should consider boosting the stimulus in 2010 then, as the recovery strengthens, they should scale back or even reverse the measures in order to strengthen public finances over the long-term.

IE