US economic growth will slow to a crawl this year, inflicting collateral damage on Europe and Japan, but the likes of China will escape the worst, the OECD said this morning.
In a report, the Organisation for Economic Co-operation and Development said inflation may remain high for some time despite the sharp US slowdown and the knock-on effect this has on growth in other primarily industrialised regions.
The OECD highlighted problems and uncertainty caused by a shift in global economic power towards fast developing nations such as China, Brazil, India and oil-rich Russia.
The OECD forecast GDP growth of 1.5 per cent for Ireland this year, a level that it notes is well below trend.
It says domestic demand will stay weak this year as the housing market continues to adjust but that the GDP growth should turn around to reach 3.25 per cent in 2009.
To maintain competitiveness and attract foreign demand wage restraint will be needed, the OECD says adding that better economic performance required stronger competition in network and sheltered service sectors and higher education standards.
For the US economy it forecast a second-quarter contraction and just 1.2 per cent growth for 2008 overall as a result of a housing slump and its impact on the broader economy.
"The picture is of a flat US economy until the end of this year and afterwards recovering only gradually," OECD chief economist Jorgen Elmeskov said, describing any suggestion that Europe or Japan could go unscathed as "a myth".
The OECD predicted a weak second quarter in the euro zone, with just 0.2 per cent growth, annualised, versus the previous quarter, and it forecast that the Japanese economy would expand 1.1 per cent also annualised in the same period.
For this year overall, growth would slow to 1.7 per cent in both the euro zone and Japan. While better than in the United States, this marks a drop from 2.6 and 2.1 per cent respectively in 2007.
"OECD economies face a triple adverse shock as globalisation evolves," the OECD said in its twice-yearly Economic Outlook, adding that emerging market economic growth would continue at a racy pace, even if it decelerated marginally.
The three shocks were the financial market turbulence which spilled out of the United States after the meltdown of the sub-prime mortgage market, the end of an international boom in house prices and soaring costs of food and fuel, it said.
"These three shocks are inextricably linked to the growing importance of emerging markets in the global economy."
"OECD economies have been hit by strong gales over the recent past and it will take time and well-judged policies to get back on course," the Paris-based organisation said.
Central banks, performing a balancing act between rising inflation and slowing growth, should leave interest rates where they are for as much as a year in the United States, in Japan and - until the end of 2009 - in the euro zone.
In Canada and Britain, however, they might need to cut rates quite sharply - by 3/4 or a full percentage point in the nearer term to offset a downturn, albeit not straight away in Britain.