LONDON: A leading British forecasting group presented a gloomy outlook for global growth Friday, warning that the euro area remains weak while the economic outlook for the United States has deteriorated.
The National Institute of Economic and Social Research also said that global inflation is on the rise but upward pressures from high oil prices are more muted than initially feared.
"The euro area remains the weak spot in the global economy,'' said NIESR researcher Dawn Holland. "It's not worse than 18 months ago but is not showing much signs of improving either.''
Releasing its quarterly report on global economic forecasts, the NIESR said that gross domestic product in the euro area will average around 2 percent a year for the next two years.
It added that outlook could fall to 1.8 percent annually if the German government raises it value added tax, or VAT, by 3 percentage points next year as currently proposed.
Globally, it said that inflation is picking up. In the OECD, it expects inflation to rise from 2.1 percent in 2005 to 2.5 percent this year.
In the United States, it predicts inflation will increase from 2.9 percent in 2005 to 3.3 percent this year.
Holland added that a weakening housing market in the United States will contribute to an economic slowdown over 2006 and 2007.
"We have seen strong house price growth in the United States for a number of years now and that's accelerated in the last 18 months,'' Holland said.
"It looks increasingly likely there will be some devaluation in the U.S., probably about 10 percent.''
The NIESR also predicted that an era of deflation in Japan is ending as the domestic economy there continues to recover, helped by last year's depreciation in the yen and an accompanying rise in exports.
However, it added that the inflationary impact of high oil prices is more muted than feared because of weaker wage growth than expected in the Group of Seven economies, particularly Germany and France.
The exception to that outlook was the United States, it said.
"This suggests that the U.S. Federal Reserve should remain more on guard than the European Central Bank,'' it said.
The NIESR is an independent economic think tank with no political affiliation. - AP