Table of Contents

  • 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.

  • Massive government and central bank intervention to provide capital, liquidity and guarantees has averted the immediate risk of systemic failure of the financial system. Nevertheless, mistrust remains rife within the banking system and, together with ongoing de-leveraging to repair bank balance sheets, is impairing the flow of credit in many OECD countries. The financial crisis has spread to a wider range of institutions and markets, including emerging economies, which until quite recently seemed to have been relatively unscathed, and there have been huge falls in global financial wealth. The malfunctioning of financial markets will be the key factor weighing on activity going forward. Related to this to some extent, and further acting as a break on growth, will be the ongoing adjustment in housing markets, which is now a feature of almost all OECD countries. Weaker oil and other commodity prices will provide some relief by boosting real household incomes.

  • After declining steadily since the early 1980s, domestic inflation picked up again in the early 2000s in most OECD countries and has accelerated significantly over the past year before receding very recently (Chapter 1) These movements can to a large extent be related to import prices and more specifically the commodity components of imports (Figure 4.1). Between 2000 and July 2008, oil prices expressed in US dollars and yen increased fivefold and non-energy commodity prices have more than doubled. Since then, commodity prices (in particular oil prices) have declined but still remain above their level in early 2007. The monetary policy responses to higher inflationary pressures have differed across industrialised economies even using benchmarks that take into account the relative cyclical positions of the major economies. Some central banks have appeared more “hawkish” on inflation, while others, where the acceleration of commodity prices inflation coincided with the beginning of financial turmoil, have appeared more dovish.