The U.S. economic recovery will be weaker than after previous deep recessions, and the high jobless rate will decline only slowly, the OECD said on Thursday.
In its twice-yearly economic outlook, the Organization for Economic Cooperation and Development said the U.S. Federal Reserve and the White House must begin to withdraw economic supports as growth becomes self-sustaining.
Gauging the appropriate timing will not be a simple task, but prolonged stimulus risks unanchoring inflation expectations and destabilizing asset markets, the OECD said.
It pegged 2010 real gross domestic product growth at 2.5 percent, a sharp reversal from the 2.5 percent decline expected for 2009 but still not strong enough to put much of a dent in the unemployment rate, which is likely to remain above 9 percent through 2011.
After the deep U.S. recession in 1982, when GDP fell 1.9 percent, growth rebounded to 4.5 percent the following year and 7.2 percent the year after that, according to U.S. Commerce Department data.
This time, the OECD is forecasting a modest 2.8 percent rise in 2011 GDP, which would be well below the 3.2 percent average from 1997 through 2006.
Stubbornly high unemployment will keep wages down, which means household demand is not likely to increase strongly next year. The personal saving rate will probably stay well above pre-recession levels through 2011, the OECD said.
The OECD pointed out that much of the recent rebound in economic growth was a direct result of government policies, including the Fed's near-zero interest rates and a $787 billion fiscal stimulus package.
The consequence of that is a growing budget deficit that is likely to remain above 10 percent of GDP in 2010. If persistently high budget deficits drive up long-term interest rates, that could compromise the recovery, the OECD said.
It also saw a risk that financial firms may incur greater losses than envisaged, notably on commercial real estate loans where defaults are on the rise.
On the plus side, rising stock markets and a turnaround in housing prices were helping to patch tattered household balance sheets, and that could lead to a stronger-than-expected rebound in consumer demand and a healthier economic recovery.
In Canada, the OECD said the recession seemed to have ended in the second half of 2009, although unemployment is likely to keep rising through the end of 2009.
The OECD said the Bank of Canada should hold the policy rate at its current level near zero until the end of June 2010, as it has committed, and probably beyond. But it said additional expansionary measures, including extending jobless benefits should be resisted to ease the budget burden.
Instead, governments should be preparing detailed and credible medium-term fiscal consolidation plans to be announced soon and be implemented when the recovery is firmly under way, the OECD said.
As for Mexico, the OECD said its central bank will have little room to lower interest rates because of inflation pressure. It said fiscal stimulus should be gradually withdrawn if the recovery takes hold as projected. (Reporting by Emily Kaiser; Editing by Andrea Ricci)