The Organization for Economic Cooperation and Development observes that global economic recovery is underway, but it warns that it remains too weak to stem the tide of rising unemployment, and it stresses that governments should be cautious in reducing stimulus.

The OECD released its latest economic outlook in Paris Thursday morning, forecasting a 3.5% decline in GDP this year for OECD countries, followed by a 1.9% rise in 2010, accelerating to 2.5% growth in 2011.

The report stresses that while recovery is now spreading across these countries it “is still too timid to halt the continuing rise in unemployment”.

The OECD predicts that the unemployment rate will peak in the first half next year in the United States, but that this may not happen until 2011 in Europe. The weak recovery is due to the fact that “households and businesses [are] repairing their finances and reducing their debts”, it says, adding that inflation is projected to continue to fall well into 2010.

“The good news is that the recovery — albeit a weak one — is underway,” said OECD secretary-general, Angel Gurría. But he added, “With millions of jobs lost and public budgets under strain, governments will have to tread carefully in the months ahead. Removing stimulus measures is imperative but such action has to be carried out gradually to avoid undermining the recovery.”

Jørgen Elmeskov, acting chief economist of the OECD said it’s time to plan the exit strategy from the crisis policies. He added that government budgets have suffered badly from the crisis, noting that the gross debt of most OECD countries could be larger than their GDP by 2011. “Radical policy action will be required in the years to come to restore sound macroeconomic balance, healthy growth and low unemployment,” said Elmeskov. “Only when that has happened will the crisis have been fully overcome.”

The OECD says that the U.S. is recovering, “with the help of government stimulus measures, a rebound in world trade underpinned by increasing demand from large emerging-market economies, stockbuilding by businesses and stabilisation of the housing market.” It predicts that U.S. GDP will grow by 2.5% in 2010 and 2.8% in 2011.

“Euro area activity will benefit from the same growth drivers as the US, but work-sharing schemes and other factors which have helped maintain many jobs during the crisis may also weaken the rate of job creation over the coming months. As a result, household confidence is likely to remain weak which could sap the strength of the recovery,” the OECD says. It forecasts the Euro area to grow by 0.9% in 2010, and by 1.7% in 2011.

Japan should benefit from strong growth in the rest of Asia, it says, but weak domestic demand will continue to limit activity. Its economy is expected to grow by 1.8% and 2.0% in 2010 and 2011, respectively.

Keep rates low, Canada urged

For Canada, it says that the contraction seems to have ended in the second half of 2009, external demand and domestic investment now appear to be rebounding, “but they also pose the greatest risks to the recovery’s sustainability”. The GDP forecast is for 2.0% growth in 2010 and 3.0% in 2011.

Unemployment is projected to keep rising until the end of 2009 and underlying disinflation to continue for several more quarters, it adds. As a result, it says that the Bank of Canada should hold the policy rate at its current near-zero level until the end of June 2010, as it has committed, “and probably beyond”.

“Given the time required to roll out fiscal stimulus and the nascent recovery, additional expansionary measures, including extending the window of eligibility for extraordinary unemployment benefits, should be resisted. Instead, governments should be preparing detailed and credible medium-term fiscal consolidation plans to be announced soon and be implemented when the recovery is firmly underway,” it adds.

IE