The world economy will shrink at a far faster pace than originally expected this year, sending unemployment soaring and highlighting the need for extra steps to halt the crisis, the OECD said on Tuesday.

The 30-nation Organization for Economic Co-Operation and Development (OECD) said member economies would contract -4.3 percent this year. That was sharply down from the last forecast of -0.4 percent, made in November.

The world economy is in the midst of its deepest and most synchronized recession in our lifetime caused by a global financial crisis and deepened by a collapse in world trade, the OECD said in its interim economic outlook.

We anticipate that the ongoing contraction in economic activity will worsen this year before a policy-induced recovery gradually builds momentum through 2010.

OECD chief economist Klaus Schmidt-Hebbel said jobless numbers in the Group of Seven rich nations would nearly double to almost 36 million and would rise by 25 million across the OECD as a whole by late 2010.

The impact of the recession on societies will be very substantial, he said, noting that unemployment rates would reach double digit levels in most countries for the first time since the early 1990s.

He said stimulus measures taken so far should stop the world seeing a repeat of the 1930s Great Depression and growth should return in 2010.

But there were substantial risks to the downside for this outlook and some governments and central banks needed to use the room they have for more aggressive policy.

DOWNSIDE RISKS

The OECD report said that risks remain firmly tilted to the downside with the largest danger that of the weakening economy further undermining the health of financial institutions, forcing them to curtail lending beyond what is anticipated.

The recession will lead to a sharp rise in unemployment, with a peak in 2010 or early 2011 and many countries reaching double digit levels for the first time since the early 1990s.

G20 leaders will meet in London on Thursday to discuss the crisis. Ahead of the summit, the report included a special focus on economic policies needed for a recovery.

An essential step to arrest the 'economic hemorrhaging' that is ongoing is to devise and implement without delay a coherent strategy that squarely tackles the mess in financial markets, the report said.

This included decisive measures for dealing with impaired assets and restoring confidence in markets. Additional macroeconomic stimulus is also critical to cushion the fall in aggregate demand, it said.

The United States has pushed for Europe to take more stimulus action ahead of the summit. The OECD said some countries, including Germany, Canada, and Australia, appeared to have more fiscal room and urged those that could afford it to make a special effort in 2010.

Policy makers should, however, make sure they can lay out a plan for scaling back stimulus as the recovery gathers pace, to persuade markets the plans are sustainable and prevent upward pressure on bond yields from worries over growing debt.

MORE RATE CUTS

The OECD praised the vigorous action of central banks with both conventional and unconventional measures.

But it urged the European Central Bank to cut its main policy rate further from 1.5 percent and said it should commit to the quantitative easing hinted at by the bank's policymakers in recent days.

The grim outlook for economic activity in the euro area and widespread evidence of falling inflation call for exhausting the remaining scope for further cuts, the OECD said.

With the bleak economic outlook, quantitative easing should be used to support demand, the report said on the ECB.

The Bank of England should keep its policy rate as close to zero as possible until the end of 2010, it said.

The Bank of Japan has used its limited scope for maneuver to cut rates to 0.1 percent and the outlook points to maintaining that rate, the OECD said.

The Bank of Japan should keep the policy interest rate close to zero and continue measures to increase liquidity until there is a definitive end to deflation, it added.

It also said the U.S. Federal Reserve must be wary of inflation expectations when the recovery takes hold.

Once economic recovery is well underway and financial conditions are normalized, the Fed will need to start raising interest policy rates ... to keep inflation expectations well anchored, something expected to happen beyond 2010, it said.

Inflation Unemployment Quantitative easing