THE global economy has begun to slow, as consumer demand in the United States — long the engine of world growth — starts to feel the pinch from the end of the housing boom, Merrill Lynch said yesterday.

The investment bank gave warning that American growth would fall sharply from 3.4 per cent in 2006 to just 1.9 per cent in 2007.

It also argued that the new Asian giants would pick up some of the slack from falling US activity, meaning the world economy would prove to be more resilient than in previous downturns. Merrill forecast that growth around the world would moderate from 5.2 per cent to 4.4 per cent.

Other reports previously have forecast a worldwide moderation of growth, led by slower demand in the US, in 2007. Merrill said that the slowdown in American demand would “come sooner and prove more persistent than generally anticipated”.

It argued that the correction in property prices “has the potential to pull the US consumer to the brink of outright recession by early 2007”. The report says that the US Federal Reserve will start to cut interest rates by the first quarter of 2007.

Other economies will thrive to the extent that they are able to “decouple” themselves from slower US growth. The report argues that Japan and India are capable of doing so, as the exposure of their export markets is relatively low, with Japan tipped to be a “global growth star performer” next year, with real growth of 3 per cent.

Merrill said that China, whose exports to the United States make up more than 10 per cent of its GDP, was more vulnerable, but it suggested that increased government spending and the ongoing strength of foreign investment should help it to achieve a sustainable growth rate.

Merrill said that the eurozone was likely to weather the slowdown in the United States better than it had in the past. In part, this would be because European exports are concentrated in the industrial sector, whereas the slowdown in America would be led by falling investment in housing.

Merrill forecast that UK growth would reach 2.3 per cent this year and 2.4 per cent next year with interest rates tipped to remain at 4.75 per cent over the next two years.

Global slowdown, local strength

Domestic demand in the eurozone is strengthening

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