OECD Report: A long recession: Managing the global financial crisis and economic downturn

Author/Editor: Klaus Schmidt-Hebbel, Chief Economist, OECD

Summary:
Many OECD economies are in or are on the verge of a protracted recession of a magnitude not experienced since the early 1980s. As a result, the number of unemployed in the OECD area could rise by 8 million over the next two years. At the same time, inflation will abate in all OECD countries and some even face a risk, albeit small, of deflation.
  This Economic Outlook represents a substantial downward revision from just a few months ago: many of the downside risks previously identified have materialised. The financial turmoil that erupted in the United States around mid-2007 has broadened to include non-bank financial institutions and rapidly spread to the rest of the world. Following the collapse of Lehman Brothers in mid-September, a generalised loss of confidence between financial institutions triggered reactions akin to a "blackout" in global financial markets. Spreads in credit and bond markets surged to very high levels, paralysing credit and money markets. 
Prompt and massive policy action to restore confidence and provide liquidity appears to have successfully limited the period of panic, but the need for financial institutions to operate with less leverage and to repair their balance sheets remains. This process of adjustment will take time and impair the flow of credit, and is the key factor weighing on activity going forward.
Author emphasise upfront that the uncertainties associated with this OECD Economic Outlook are exceptionally large, especially those related to the assumptions regarding the speed at which the financial market crisis–the prime driver of the downturn–is overcome. Specifically, Author assumes that the extreme financial stress since mid-September will be short-lived, but will be followed by an extended period of financial headwinds through late 2009, with a gradual normalisation thereafter.

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