A major slowing in the US economy is now possible, and the impact on other economies could be significant, the Central Bank warned this morning.
"Although growth seems set to remain strong in many regions, the US is likely to be an exception with a significant deceleration in prospect," the bank said in its quarterly economic bulletin.
The bank has cut its growth forecast for the economy for the second time in four months, predicting that GDP for 2008 was likely to be 3 per cent, having previously forecast 3.5 per cent in October 2007.
Turbulence on financial markets also poses a "significant risk" to the global economy and is compounded by uncertainty about how long it will last, the Central Bank said.
"Sharp movements in oil prices, which are currently at very high levels, and the depreciation of the US dollar against the euro are other factors which contribute to this uncertainty," it added.
Within the euro zone, the bank said the impact of market turbulence had so far been largely confined to the financial sector. "However, signs that it is having a broader economic impact in the US and UK are beginning to appear," it added.
Europe's resilience so far had been helped by the fact that the economy was growing strongly before the onset of the credit crisis, the bank said.
"Underlying economic fundamentals in the euro area remain favourable, with strong employment growth boosting household incomes and corporate balance sheets remaining quite healthy."
But the bank said that uncertainty about the prospects for euro area growth had increased and that risks surrounding the outlook were on the downside.
Despite slowing growth momentum, inflation had moved up sharply in recent months, the bank said.
"The headline rate is expected to remain elevated in the months ahead," it added. "The [European Central Bank] governing council has signalled its determination to ensure that upside risks to price stability do not materialise."
The bank said actions by major central banks had eased problems at the shorter-end of the interbank market and helped to encourage a narrowing of spreads between longer-term rates and policy rates.