Grim outlook from OECD

The Organisation for Economic Cooperation and Development added to a grim outlook from the World Bank today by saying major economies…

The Organisation for Economic Cooperation and Development added to a grim outlook from the World Bank today by saying major economies will contract throughout 2009 and the problem of unemployment will linger.

“We see a very difficult 2009, with negative growth in the OECD area. Unemployment problems are going to continue to linger,” Angel Gurria, the head of the Organisation for Economic Cooperation and Development told Reuters television in an interview on the sidelines of a conference in Paris.

Earlier the World Bank said prospects for the global economy remain "unusually uncertain" as it cut 2009 growth forecasts for most economies.

Governments around the world have borrowed hundreds of billions of dollars to fight the worst economic crisis in decades, providing incentives for businesses and consumers to spend and embarking on big infrastructure programmes to create jobs and stimulate activity.

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They should stick to spending programmes to reignite growth because their economies are still weak in spite of signs that the worst of the crisis may be past, World Bank chief economist Justin Lin said in an interview with Reuters.

Lin also said he was concerned about rising borrowing costs and weak external financing conditions for the emerging economies of Europe and Central Asia.

Yesterday European Central Bank President Jean-Claude Trichet warned, however, that governments now had no room for more debt and would have to start bringing down budget deficits.

“There is a moment where you can't spend anymore and you can't accumulate any more debt. I think we are at that moment,” Mr Trichet told Europe 1 radio.

The euro slipped against the dollar and yen as the market awaited the ECB's first ever one-year refinancing operation on Wednesday aimed at getting banks lending again and reducing the cost of borrowing for banks, firms and consumers.

Like the ECB, the US Federal Reserve has cut interest rates to record low levels and used unorthodox means to pump more money into the system.

The Fed's interest rate setting committee meets tomorrow and Wednesday and economists polled by Reuters see no chance that the Fed will raise its benchmark short-term interest rate from the current level near zero.

The Fed is also seen unlikely to ramp up its purchases of US government and mortgage-linked debt as investor focus shifts to inflation on evidence that the economy is stabilising.

Japan's tankan survey showed pessimism at big Japanese manufacturing firms eased in the three months to June.

The business survey index (BSI) of sentiment at large manufacturers stood at minus 13.2 in April-June, compared with minus 66 in the previous quarter, the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office, said today.

“We'll likely see a big improvement in sentiment in the BOJ's tankan survey,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“But it's too early for the BOJ to examine an exit strategy. Companies are still saddled with excess capacity. Capital spending will likely remain weak for some time.”

The Bank of Japan is unlikely to wind down its unconventional stimulus policies in spite of the less-bleak view of Japanese manufacturers, economists said.

Reuters