Haunted perhaps by the ghost of Herbert Hoover, global leaders have steered the world away from a 1930s-style Great Depression by a "very, very, high level of awareness" of the policy errors of his era, a top international economist said as he released an OECD study of efforts to save the world economy.
Klaus Schmidt-Hebbel, chief economist for the Organization for Economic Cooperation and Development, spoke to The Associated Press as he slashed forecasts for growth in the 30 rich countries that make up its membership, predicting the economies of the OECD countries will shrink by 4.3 percent this year, and by 0.1 percent next year.
The new forecasts released Tuesday compare with a November forecast that the OECD economy would shrink by 0.4 percent this year and grow by 1.5 percent in 2010. It would have been worse without government stimulus plans, which will add 0.5 percent to the OECD economy this year and next, according to the Paris based organization.
The new spending is a sharp contrast with Hoover-era policy, which saw protectionism and efforts to balance budgets and raise interest rates. "We would be looking into a Great Depression like scenario if we had done the same policy mistakes which were done in the 1930s," Schmidt-Hebbel said in an interview at the OECD headquarters in Paris. The club of rich nations predicts a "policy-induced recovery" will start to pull the global economy out of recession in 2010.
Jobless lines could keep growing through 2011, the organization said, noting that the number of unemployed in the Group of Seven rich countries will almost double in mid-2007 to reach some 36 million people in late 2010. As Group of 20 leaders of rich and developing countries prepare for a summit in London this week, European countries are emphasizing a toughened regulatory system for global finance while the U.S. administration has urged more spending -- an idea that holds little interest for Europeans wary about debt.
Three years of stimulus measures until 2010 add up to 5.6 percent of 2008 gross domestic product in the United States, compared with 3 percent in Germany, 0.6 percent in France, 1.4 percent in Britain and 2 percent in Japan, the OECD study shows.
Thanks to more generous social programs however, European governments require less extra stimulus to cushion the impact of recession and safety nets may need to be strengthened in countries like the United States, the OECD said. Economies absorb the extra spending in different ways, and only for the United States and Australia will the stimulus package boost growth by more than 1 percent of GDP this year and next. In Germany, where people are more likely to save, the OECD estimates the impact at 0.5 percent of GDP this year and 0.7 percent in 2010.
When it comes to spending, Germany and Canada could afford more stimulus, the OECD says. High debt levels means Italy and Japan cannot. 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 and toppling U.S. President Hoover, who lost the 1932 election to Franklin Roosevelt.
Even though a World Bank study showed 17 of the G-20 countries have implemented trade-restricting measures since they pledged at a summit in November to avoid protectionism, he said the measures are limited and there "should be sufficient pressure on countries to reverse or remove" them.
The U.S. Federal Reserve, which disastrously tightened monetary policy in 1928, should keep its near zero-rate interest rate policy through 2010 and consider buying more long-term U.S. Treasuries and agency securities to support growth and stave off deflation, the OECD said.
The European Central Bank could cut rates further and expand the supply of money by buying securities, which would support growth, he said. The ECB is restricted by European Union rules that forbid it from buying bonds directly from governments, although it could buy corporate debt or lengthen loans to banks. High praise is reserved for the Bank of England, which Schmidt-Hebbel says has been "very exemplary" in both quickly cutting borrowing costs and more innovative ways of supporting the economy.
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 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 questions whether there are sufficient funds or private sector interest for the plan to succeed.
The OECD said the United States is likely to contract by 4 percent in 2009 and stagnate in 2010. The 16-nation euro-zone will likely shrink by 4.1 percent this year and by 0.3 percent next year, while Japanese output is expected to contract by 6.6 percent in 2009 followed by 0.5 percent next year.