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The world economy is in the midst of its deepest and most synchronised recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade. Tight financial conditions and low confidence are weighing on output and employment in OECD and non-OECD countries alike. In turn, shrinking activity and income is further undermining bank balance sheets, magnifying the downturn.
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The OECD economy is in the midst of its deepest and most widespread recession for more than 50 years (Table 1.1). Output has declined in almost all OECD countries in the past six months and with non-OECD countries slowing sharply, world growth has turned negative. Tight financial conditions and a generalised loss of confidence will continue to weigh on activity in the current year before a projected policy-induced recovery brings growth close to potential by end-2010. By that time, an exceptional degree of slack will have emerged in the OECD economy, with unemployment rates of above 10% in the United States and the euro area. This will push down inflation rates to close to zero in several countries, and some will experience falling price levels.
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Discretionary fiscal stimulus is playing an important role in OECD countries? policy response to boost demand in the wake of the financial crisis. This reflects the severity of the downturn, both in terms of depth and duration, combined with the limits of monetary policy, both because the room for additional interest rate cuts is becoming increasingly slim in many OECD countries and especially because monetary transmission channels may be impaired.