AKC News // World economy close to turning point, says Trichet

The global economy is close to a turning point, European Central Bank (ECB) president Jean-Claude Trichet said yesterday, as the Organisation for Economic Co-operation and Development (OECD) published data showing that the pace of decline is now easing.

But the Irish economy is unlikely to show any significant “signs of life” until at least the end of next year, with the rate of unemployment set to continue rising, economists warned.

New unemployment data from the OECD shows that Ireland had the second-highest rate of unemployment among OECD nations in March, after Spain.

By contrast, the OECD said there were “tentative signs of, at least, a pause” in the economic slowdown in the UK, France and Italy. These countries, along with China, have now reached a “possible trough”.

The OECD’s composite leading indicators (CLIs) decreased by just 0.1 per cent in March, although they are still down 9.5 points year-on-year.

Speaking at a meeting of central bankers in Basle, Switzerland, Mr Trichet said policymakers were seeing the first “encouraging” signs of a recovery.

“As far as growth is concerned, we’re around the inflection point in the cycle, that’s the sentiment,” Mr Trichet said.

But he added that it was “no time for complacency”. Central banks would have to “do what is necessary in terms of extraordinary measures, as long as necessary” before scaling back their support for the economy once global growth starts to pick up, he said.

“Insistence is put on the exit strategy, on the medium-term path that permits us to go back to a normal situation, a sound and sustainable situation,” he said.

The ECB last week cut its key interest rate to 1 per cent, a record low, and announced it would buy €60 billion of covered bank bonds as it steps up its efforts to revive lending.

The US Federal Reserve and the Bank of England have adopted major asset purchase programmes, a strategy known as quantitative easing, in a bid to kick-start their economies.

The comments by Mr Trichet and statement by the OECD have renewed hopes that the global recession could be “V-shaped”, with a swift recovery, rather than a more prolonged “U-shaped” downturn or an extended “L-shaped” depression in which economic activity plummets and then remains in a trough for an extended period.

But recovery in the Irish economy is unlikely to occur until at least the end of 2010, as it will lag any recovery in Europe, which in turn will lag the recovery in the US, Goodbody economist Dermot O’Leary said yesterday.

“The signs of life are more believable in the US than in Europe. I think Europe is still sick,” he said.

Central banks would have be careful not to withdraw support for credit markets at the wrong time, as occurred in Japan in the early 1990s, he warned.

“In Japan, they saw glimmers of hope and they reversed their policies, only to find it was a false dawn, and so the economy contracted again,” he said. “That’s what central bankers have to be careful about.”

Source: The Irish Times

Date : 12-05-2009