The US economy is decelerating but Europe's resurgence and Asia's China-powered strength will prevent the world economy from derailing as it did after the 2000 stock market crash, the OECD said in a report yesterday.
"Rather than a major slowdown, what the world economy may be facing is a rebalancing of growth across OECD regions," said Jean-Philippe Cotis, chief economist at the Organisation for Economic Cooperation and Development.
In its twice-yearly Economic Outlook, the OECD forecast growth easing next year to 2.5 per cent across its 30 mainly rich, industrialised member countries from 3.2 per cent this year, and regaining some speed in 2008.
China, India and other fast-growing emerging economies such as Russia would keep going healthily and Europe's comeback this year contributed towards a "rebalancing" of global demand and output, mitigating the impact of a US slowdown that would have spelled trouble for all in decades past.
The OECD cut its growth forecast for the US economy, hit by a housing market slump, to 3.3 per cent for this year from the 3.6 per cent predicted previously, and predicted expansions of 2.4 and 2.7 per cent for 2007 and 2008 respectively.
Mr Cotis said the slowdown expected at OECD level was nothing like the one that hit in 2000 when most economies outside of Japan were overheating and stock market valuations had hit record heights.
"Is history repeating itself? In principle, no. What we see is a slowdown, not a recession," he said.
"We're getting the rebalancing we've been awaiting for so long, and it's happening gradually rather than abruptly."
The OECD raised its predictions for euro zone growth to 2.6 per cent for this year followed by 2.2 and 2.3 in the next two years, closer to what is considered its natural potential and, while not exceptional, way better than 2005's 1.5 per cent.
It believed the European Central Bank would continue to raise interest rates, to reach four per cent in early 2008, twice the level of late 2005 when the ECB started tightening credit to head off inflation.
Despite saying inflation posed more of a risk in the United States than in years past, the OECD said it expected the US Federal Reserve to keep official interest rates on hold next year, and cut in 2008 as inflation pressures receded.
The OECD expects the US economy to pick up a bit after a lull that may last only the first few months of next year.
It advised Japan to hold off on rate rises until it was far clearer that deflation, a scourge for many years, was indeed as dead as the authorities would like to believe, noting that wages were, worryingly, dead flat. It predicted 2.8 per cent growth this year followed by two years of two per cent expansion.
China continued to power Asian expansion with growth rates of 10-11 per cent in recent quarters and India too was growing briskly despite a hit from high oil prices and slightly tighter monetary policy in 2006.
Elsewhere in the world, the OECD said Slovakia would lead the pack of rapidly growing eastern European economies with eight per cent growth this year and next while Poland would grow at an annual rate of five per cent in 2006-2008.
Mexico would show growth of 3.5 or four per cent and the pace should accelerate in Brazil to 3.8 percent next year and four in 2008, from 3.1 per cent this year, one of the less impressive performances from the major emerging market nations.
While the downturn in the US housing market marked the end of a decade-long boom that also occurred across much of the rest of the world, the OECD said the impact was marked in the United States because of a more direct link between home financing and wider consumption patterns.
"It is comforting to note that in many countries households seem well prepared to cope with the consequences of a downturn in housing markets... household balance sheets are generally sound and debt-servicing burdens still moderate, although some low-income households may be overstretched."
House prices have more than doubled across the OECD in the past decade. Updated OECD figures showed the rises in the first half of 2006 were most notable in Denmark, Sweden, Ireland and France, with Danish prices up 22 per cent compared to the same period of 2005, France up 10.9 and US prices up 7.3 per cent.
Germany, one of the few countries to miss out on the house price boom of the past decade, is nonetheless regarded as the driving force of Europe's economic rebound in 2005 and Mr Cotis said it was strong enough now to weather the hit coming in January with a big rise in value-added tax.