The World Bank has downgraded its outlook for global growth for this year and sees the risk of recession and deflation in the United States, according to a bank report obtained by Reuters.

In the last month, the bank has cut its forecast for world gross domestic product growth from 2.4 per cent to 2.3 per cent this year. The report also warns of risks to the global recovery should the Iraq conflict turn out to be lengthy.

"Our baseline remains one of a gradual recovery," said the report prepared for an executive board discussion on the world economy on Thursday. "However, downside risks are substantial if the war were to be protracted or the region does not stabilise."

High-income countries are expected to grow just 1.9 per cent this year, down from an earlier forecast of 2.0 per cent, while developing economies should expand 4.0 per cent, the same as the previous forecast.

The US economy grew just 1.4 per cent in the final quarter of last year, government data out on Thursday showed, after advancing a robust 4 per cent in the third quarter.

Consumers, who account for two-thirds of the economy, have cut back on spending as they worry about higher oil prices, the impact of the war on the economy and weaker stock markets.

Earlier, the bank's sister institution, the International Monetary Fund, warned of a risk of a global recession if the Iraq war is longer than expected.

Japan will suffer too

And the slowdown in the United States will have a knock-on effect in Japan, the World Bank predicts with exports likely to continue to deteriorate as the key US market softens.

The bank also warned that failure of Japanese banks to raise capital ahead of the financial year-end, could force banks to cut back their loans sharply "and/or require an injection of public funds and possible nationalisation".

The report also highlighted evidence of growing weakness in the euro-area economy, saying that financial markets are increasingly concerned that Germany might fall victim to a Japanese-style recession.

"Matters are made worse by the strengthening euro," the report said. "Yet there is not much leeway in the rigid EMU policy framework to give Germany special treatment."

The bank also predicted industrial production in rich countries to grow 2 per cent in the first half of this year, slowing to 1.5 per cent year-on-year by June.

Oil prices could rise again

Higher oil prices will be partly to blame for the slowdown in output this year, the bank said.

The bank raised its forecast for the world oil price average by $2 per barrel to $26 per barrel for this year but said this was based on expectations for a quick resolution to the conflict in Iraq.