EU Lifts Euro-Zone Growth Forecast With Help From Germany

The forecast for 2006 marks a solid acceleration of economic activity in the 12 nations that share the euro after growth last year of 1.3 percent. However, looking farther ahead, the commission predicted in its Spring Economic Forecasts that growth would slow to 1.8 percent next year. It also estimated that growth in the 25-nation EU would peak this year at 2.3 percent after 1.6 percent last year. Growth was forecast to ease back slightly to 2.2 percent next year.

"Both the EU and the euro area are expected to grow markedly stronger this year," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.

European economies were reaping the benefits this year of firming domestic and foreign demand, which encouraged companies to make investments even though rising interest rates were making borrowing more expensive.

The commission said in the report containing its forecasts that "investment is set to continue growing at a rapid pace underpinned by optimistic business sentiment, a favorable profit outlook and the increased need for replacement investment."

Germany singled out

The commission singled out Germany as a bright spot and forecast that the growth rate of the biggest euro-zone economy would nearly double this year to 1.7 percent from 0.9 percent last year. In February, Brussels had forecast that the German economy would grow 1.5 percent.

The German economy was benefiting from households splurging this year on consumer goods ahead of a planned increase in value added tax next year, the commission said, predicting that growth would ease "temporarily" to 1.0 percent in 2007.

The stronger growth across Europe would help bring down stubbornly high unemployment, which was seen falling to 8.4 percent of the euro-zone workforce this year from 8.6 percent in 2005.

Oil prices pose big risk

Despite the improving economic outlook however, public finances in the euro zone were not expected to strengthen. The commission predicted that the combined public deficit of euro-zone members would stand at 2.4 percent, the same as next year.

The inflation front was expected to hold steady, meanwhile, even though oil prices recently hit all-time highs on global markets. Following a rate of 2.2 percent in 2005, euro-zone inflation was forecast to remain at 2.2 percent this year and next.

However, the commission said that oil prices represented the "biggest near-term risk" to European economies. "The very low spare capacities make markets extremely vulnerable to actual and potential supply disruptions," the commission said.

Because of market volatility, forecasts that oil would average $68.9 per barrel for 2006 and $71 per barrel for 2007 were subject to change, it added.