The Organisation for Economic Co-operation and Development (OECD) has said that it expects the UK economy to contract by 0.7% in 2012.
This is a significant decrease from the OECD’s forecast in May that the economy would grow by 0.5% this year.
In its latest Interim Economic Assessment, the organisation confirmed that the global economy has weakened since the spring, driven by developments in the euro area where key European countries are entering a recession that is having an impact worldwide. The persistent crisis in the euro area is weakening confidence, trade and employment and slowing economic growth for OECD and non-OECD countries alike.
Downgrading its growth forecasts for developed economies across the world, the OECD revealed that it expects Britain to be one of the worst hit. The economies of Germany, France and Italy are predicted to shrink by just 0.2% on an annual basis. Outside of Europe the prospects are somewhat brighter, with growth expected in the US, Canadian and Japanese economies.
The OECD called for further policy action to be taken in order to instill more confidence, for example by cutting rates and expanding stimulus programmes. It also said that the European Central Bank should lower the rates at which banks borrow from it and consider further action to help normalise monetary policy transmission in vulnerable countries.
Pier Carlo Padoan, chief economist at the OECD, stressed that resolving the euro area’s banking, fiscal and competitiveness problems is the key to recovery.
Throughout the 1990s, Japan experienced an asset price bubble which halted economic growth for the better part of a decade. Residents call it the ‘lost decade’, while those outside of the country with investment capital in Japanese businesses have referred to the late 1990s economic bubble as one of the largest cases of nationwide economic mismanagement in history.
It’s been blamed for Japan’s decline in the industrial manufacturing race, one it’s now locked into with nearby rival China. And while the Japanese industrial sector may not have fully recovered from the crash, many believe it will continue to work efficiently. However, with the United States recovering from a similar period of financial error, many believe the ‘lost decade’ could make its way across the Pacific.
Financial experts have pointed to the United States’ housing bubble as a similar economic trend to that seen in Japan, arguing that it could set off a similar long-term recession effect. While US-based businesses have largely recovered from the recent recession, the country has several pockets where growth is not expected for the remainder of the year due to unemployment and mass foreclosures.
It’s a prospect that’s surprisingly realistic. With President Barack Obama pointing towards the asset bubble in 2009 as a possibility for the United States, many believe that a decrease in output is an inevitability. While the Japanese survived the long-term downturn through traditional frugality, it seems unusual that such an economic trend would not cause major problems in the United States.
However, it’s important to establish that the prospect of major long-term economic contraction is fairly low, both in North America and other developed economies. With the economy currently in a state of slow expansion, a lost decade of economic contraction is unlikely under current industrial productivity and policy stability.