Drastic measures needed

Bloomberg

"In normal times, monetary rather than fiscal policy would be the instrument of choice for macroeconomic stabilization," the OECDsaid yesterday. "But these are not normal times."

The U.S., Japanese, U.K. and euro-area economies will all shrink next year as the global financial crisis takes its toll on the broader economy, according to the OECD. While policy action has limited a "period of panic," the economic uncertainties are "exceptionally large" and growth will recover only gradually from the second half of 2009.

The OECD also cut its forecast for global growth in 2009. The economy of the organization’s 30 members will contract 0.4 percent in 2009 after expanding 1.4 percent this year. Earlier this month, it predicted a 0.3 percent contraction next year.

Governments across the world have already announced measures to protect their largest banks from collapse and stimulate spending and investment in their economies. Tax cuts may prove more effective as a boost to growth than alternatives such as spending on infrastructure.

Slashing taxes
U.K. Chancellor of the Exchequer Alistair Darling Monday said he will cut the country’s value-added tax to 15 percent from 17.5 percent. The European Union is scheduled to unveil a stimulus package today and German Chancellor Angela Merkel and French President Nicolas Sarkozy said Monday in Paris they are considering further steps for their own economies.

In the U.S., President-elect Barack Obama said he aims to create 2.5 million new jobs in a two-year plan that Democrat lawmakers including Senator Charles Schumer of New York said may be as big as $700 billion.

Governments must also be prepared to expand efforts to protect banks and stabilize financial markets. "Such support should be limited to sectors or firms that are of systemic importance," the OECD said.

U.S. gross domestic product may contract by 0.9 percent in 2009 after growing 1.4 percent this year, the OECD forecast. Japan will shrink by 0.1 percent, the euro area by 0.6 percent and the U.K. by 1.1 percent.