The weak euro zone economy poses a key threat to global growth, the OECD has warned, urging more flexibility in fiscal rules for struggling EU members like France and Italy to prevent another recession.
The OECD provides economic analysis and advice to its 34 industrialised members.
It predicted that the global economy will gradually improve over the next two years but Japan will grow less than previously expected while the euro zone struggles with stagnation and an increased deflation risk.
There will be marked divergences among countries both in terms of growth and monetary policy, leading to volatility in debt and foreign exchange markets, the organisation said.
The US and Britain will grow more strongly then the euro zone and Japan and, among emerging countries, India, Indonesia and South Africa are set to recover steadily.
Russia's economy is set to stagnate next year and China's will soften, the think-tank said in its bi-annual economic outlook.
Overall, the global economy is set to grow by 3.3% this year, 3.7% in 2015 and 3.9% in 2016, the OECD said, confirming forecasts published before the G20's summit earlier this month.
The OECD has pencilled in Irish growth forecasts of 4.3% for this year, 3.3% for next year and 3.2% for 2016. This is slightly below government forecasts for growth of 4.7% this year and 3.9% in 2015.
While most estimates remained unchanged, Japan's forecast was more than halved for 2014 and cut to 0.8% for next year after it unexpectedly fell into recession in the third quarter.
But the OECD still expects Japan to recover as corporate profits remain high and a weak yen will help exports.
A bigger worry for the Paris-based think-tank is the euro area, which it said "may have fallen into a persistent stagnation trap".
"The euro area is at risk of deflation if growth stagnates or if inflation expectations fall further," it said.
Its inflation forecasts of 0.6% for the euro area next year and 1% for 2016 are slightly more pessimistic than the EU's own forecasts and far from the European Central Bank's target of just below 2%.
The OECD today reiterated its call for the ECB to embark on quantitative easing in the euro zone.
"Further monetary stimulus could involve more purchases of asset-backed securities and covered bonds, and also purchases of government bonds, possibly via a weighted basket of euro area countries, and investment-grade corporate bonds," it said.
The OECD said that below-target budget plans put forward by France and Italy, which are expecting the EU's verdict on their policies by the end of the week, are "appropriate" to help boost growth.
In the US, growth is projected to gain more momentum and remain above trend, the OECD said, reaching 3.1%next year.
Britain's economic growth looks set to slow slightly to 2.7% next year, the OECD said - above the long-run average but just below the 2.9% forecast by the Bank of England earlier this month. Continued weak productivity remained a major risk.
The Bank of England should start to raise interest rates in the middle of 2015 to stop inflation picking up too much, the OECD added, a few months earlier than implied by the BoE's recent economic outlook.
Growth in China is projected to soften a bit, the OECD said. "Stimulus measures taken this year continue to support output growth, but property market activity remains weak," it added.
While geopolitical tensions over Ukraine and the Middle East have grown, this has had little impact on commodities markets so far but the risk remains, the OECD said in today's report.
"We are far from being on the road to a healthy recovery. There is a growing risk of stagnation in the euro zone that could have impacts worldwide, while Japan has fallen into a technical recession," OECD Secretary-General Angel Gurría said.
"Furthermore, diverging monetary policies could lead to greater financial volatility for emerging economies, many of which have accumulated high levels of debt," he added.
