CANBERRA, Oct 27 AAP October 27 2008, 1:38PM A repeat of the Great Depression is highly unlikely, largely because of the massive rescue plans now in place, Organisation for Economic Co-operation and Development (OECD) chief economist Klaus Schmidt-Hebbel says.
In an interview with the OECD Observer magazine, Mr Schmidt-Hebbel said he expected many OECD countries would slip into recession and that recovery would likely be slower than in recent economic downturns.
Mr Schmidt-Hebbel said an economic depression was an "ambiguous concept" and that some people thought of it as a very deep and drawn out recession.
"Of course, this is the worst financial crisis in decades, but a repeat of the 1930s Great Depression is highly unlikely, thanks in large part to these massive rescue plans now in place," he said.
The OECD will release its next economic outlook on November 25 in which it will lay-out how it sees the global financial crisis unfolding.
"Our base scenario is built on the premise that the current freeze in short-term financial markets will be resolved in a relatively short time span," he said.
But he said rebuilding trust in financial markets would take much more time, and could mean a more protracted period of restrictive financial conditions, affecting loans and access to funding.
"We expect a significant weakening in the world economy, with many OECD economies slipping into recession sooner or later," he said.
"It is likely that recovery will depend largely on how quickly financial markets resume transactions and lending, even if that lending remains restricted, at least compared with 2002-2007."
But he said macroeconomic policy should also play an important role in cushioning the recessionary impact of the crisis.
"As economies quickly weaken and inflation recedes there will be room for interest cuts in some OECD economies, not to mention timely, temporary, and targeted fiscal stimulus as well."
However, he sees two major risks for the outlook.
One is that the freeze in financial markets and lending could take more time to thaw out with more severe effects on spending, output and employment.
"This would lead to a deeper and more persistent recession," he said.
The other risk comes from yet unknown budgetary costs associated with rescue plans undertaken by various governments.
"When the financial crisis and recessions are behind us, fiscal adjustment will be called for to maintain confidence in public debt and currencies, particularly in those countries that have had to foot high costs in bailing out their banks," he said.
But he said there was a prospect of some favourable outcomes from a weaker world economy - an easing in oil, food and other commodity prices.
"If the downward trend proves larger than we currently envisage, this would bring still lower inflation and gains in real incomes for commodity importers, as well as providing more room for further monetary policy easing," he said.
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