Fears of U.S. recession growing: Irish central bank

By Jonathan Saul

DUBLIN (Reuters) - Financial market turbulence and fears of a U.S. recession are expected to lead to a subdued performance by the world economy this year, posing risks for euro zone growth, the Central Bank of Ireland said on Friday.

"There is now a growing consensus that a significant downturn in global activity is underway, with risks to the outlook seen to be firmly to the downside," the bank said in its quarterly bulletin.

"Following a number of years of strong growth, the prospects are for a more subdued performance by the global economy this year."

The bank said since late last summer, global financial markets and central banks had been dealing with the fallout from problems related to a "major correction in many financial asset prices," which had helped trigger a global slowdown.

"The resulting increased uncertainty and international financial market turbulence are proving to be more wide ranging and prolonged than was hoped," it said.

The bank said the main risks related to the "still evolving" situation in global financial markets.

"Much will depend on how events play out in the U.S.," it said. "Recent data suggest that the U.S. economy has weakened significantly since late last year, with concerns heightening about the possibility of a recession."

The bank said euro zone activity had slowed in the final quarter of 2007 after recording strong growth in the first nine months.

It said while the "underlying fundamentals" of the euro zone remained favorable, with employment growth and corporate balance sheets remaining healthy, evidence in recent months suggested the pace of growth had "remained below potential."

"As is the case elsewhere in the global economy, uncertainty about the prospects for euro area growth remain unusually high and risks surrounding the outlook are on the downside," it said.

Despite the softening in growth momentum, euro zone inflation had sharply risen in recent months due the spike in oil and food prices.

The bank said headline euro zone inflation was expected to remain elevated in the months ahead before starting to decelerate.

It said the European Central Bank's Governing Council viewed inflationary risks to the upside due to the potential for higher oil and food prices and scope for wage rises.

"The Governing Council has signaled its determination to ensure that such second-round effects and upside risks to price stability do not materialize and that medium and long-term inflation expectations remain firmly anchored in line with price stability," it said.

(Editing by Mike Peacock)