People attending the OECD forum watch a screen with unemployment indications Wednesday at the OECD headquarters in Paris

The advanced economies will soon hit the bottom of the recession and have begun the long haul toward a weak recovery by the end of the year, the Organization for Economic Cooperation and Development said.

Saying this was the first time in 24 months that it had raised, instead of lowered its forecasts, the OECD said member states’ combined economic output this year would shrink 4.1 percent, rather than 4.3 percent.

“It looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom. Even if the subsequent recovery may be slow, such an outcome is a major achievement of economic policy,” it said in a regular review.

A massive fire-fighting effort by governments and central banks had pulled the world back from the brink of “catastrophic events,” it added.

The Paris-based OECD said it expected the US economy to contract 2.8 percent this year and grow 0.9 percent in 2010, with Japan down 6.8 percent before returning to growth of 0.7 percent in 2010.

The 16-nation eurozone would shrink 4.8 percent, with zero growth in 2010.

The financial sector remained under tension “and the bottom of the recession is likely to be reached only in the second half of the current year, after which a weak recovery is projected.”

There were growing signs US activity could “bottom out” in the next six months in response to “tremendous” supportive measures and recovery seemed to “be in motion” in most big countries outside the OECD, notably China following a major stimulus package.

Japan also seemed to be close to the end of a sharp downturn but recovery there would be slow and a large amount of spare capacity ran the risk of causing deflation – a sustained period of falling prices.

In the eurozone, signs of recovery “are not yet as clearly visible,” it said.

The OECD said massive intervention had contained the worst economic crisis for 65 years and further stabilization of the financial sector could boost the chances for recovery.

There must be “swift recognition of losses in banks and accompanying capital injections,” it said.

The OECD said that among immediate dangers and uncertainties, there was the prospect of a substantial rise in unemployment, which would likely hit 10 percent in the US and more than 12 percent in the eurozone.

This could in turn add to the deflation risk and undercut household spending, a key driver in any economy.

Governments should do their utmost to keep interest rates exceptionally low, at close to zero, and continue to support the financial sector until recovery is underway, it said.

At the same time, the OECD noted that long-term interest rates, as determined by bond yields, would be under pressure to rise as governments issued more bonds to raise funds for stimulus packages and other measures.

“The economic crisis will cast a long shadow,” the OECD said, noting that economies would emerge from it with a lower potential for sustainable growth than they had before the crisis.

Europe would be particularly at risk from an increase in long-term, structural unemployment, it added.

Source: AFP