The US economy is likely to have ground to a halt during the spring and its growth is set to stay enfeebled for an extended two-year run, inflicting knock-on damage to Europe and Japan, a leading international think-tank said yesterday.

Rich economies across the West are being battered by a “triple whammy” of soaring oil and commodity prices, financial turmoil and the end of a world housing boom, the Organisation for Economic Co-operation and Development (OECD) said.

The developed world faced a prolonged economic shock from the combined toll of these three damaging forces, the OECD said in its twice-yearly assessment of global prospects.

The 30-nation club of wealthy countries said that the impact was set to hit industrial economies well into next year and confronted central banks with a tricky balancing act between weakening growth and persistent high inflation.

“OECD economies face a triple adverse shock as globalisation evolves,” yesterday's report said, although it added that emerging market nations would see their growth continue at a racy pace.

Jorgen Elmeskov, the institution's acting chief economist, said that the OECD had been hit by “strong gales over the recent past ... It will take time and well-judged policies to get back on course.”

Across all its members, the OECD cut its forecast for economic growth to 1.8 per cent this year, down from its previous 2.3 per cent projection made six months ago. For 2009, it predicted OECD-wide growth of a still-weaker 1.7 per cent, down from 2.4 per cent.

The US economy is set to bear the brunt of the downturn, yesterday's assessment suggested. America's growth is forecast to grind to a halt in the present, second quarter of this year, and eke out an annual gain of only 1.2 per cent over 2008, down from the OECD's previous projection of 2 per cent growth this year. The think-tank projects growth in 2009 of only 1.1 per cent, compared with its previous expectation of 2.2 per cent.

Despite this downgrade, the OECD said that the US Federal Reserve should now keep interest rates pegged until recovery takes hold.

It rejected suggestions that Europe and Japan could remain immune from American woes thanks to so-called “decoupling”. The OECD's new forecasts predict that both the 15-nation eurozone and Japan, the world's No 2 economy, will see weakened growth this year of 1.7 per cent.

Warning to China

China must quell inflation that is overheating its economy, the OECD told Beijing yesterday. Persistent inflation, stoked by swift expansion and currency inflows into China's economy, jeopardise its transition from dependence on exports to growth based on domestic demand, the think-tank said. The longer the inflationary forces persisted, it said, the greater the threat of a marked slowdown.

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