OECD forecasts four quarters of contraction

The US and the eurozone are set to suffer four consecutive quarters of contracting output that will not come to an end until the middle of 2009, according to the Organisation for Economic Co-operation and Development.

The OECD, which only a few months ago forecast that most eurozone area economies would experience flat growth in the second half of this year – and that the UK would experience a mild technical recession – is now forecasting four consecutive quarters of contraction for the US, countries using the euro, and OECD nations as a whole.

"Many OECD economies are in or are on the verge of a protracted recession of a magnitude not experienced since the early 1980s," the think tank for the 30 rich countries said in its latest Economic Outlook, published on Tuesday.

Over the next two years, the number of unemployed in those economies could rise by 8m. However, inflation is likely to abate in all OECD member states and some face a small risk of deflation.

The UK – for which the OECD forecast as recently as September a technical recession in the second half of 2008 – is now likely to see real gross domestic product growth of 0.8 per cent year on year. For 2009, UK growth is likely to contract by 1.1 per cent. Recovery will begin in the second half of 2009 but will remain insipid, with 2010 seeing GDP expansion of 0.7 per cent.

The Paris-based organisation emphasised that the uncertainties associated with its latest forecast were "exceptionally large". The most significant of these relate to the speed at which the financial market crisis – which the OECD regards as the prime driver of of the downturn – is overcome.

Recent OECD research has drawn attention to the greater severity of economic downturns precipitated by a financial crisis, as has been the case for the past year. In pinpointing countries that will experience a severe downturn, in addition to the UK, the OECD lists Hungary, Iceland, Ireland, Spain and Turkey.

The financial crisis is not the only driver of the projections; others include housing market adjustments, which the OECD said had "a long way to go", based on past housing cycles. Moreover, these come on top of negative wealth effects from falling equities markets.

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