Euro zone growth is gaining momentum amid surprisingly strong activity in Germany, the European Commission said Tuesday, a day after the Ifo research institute predicted unexpected levels of growth in the German economy.
After gloomy days of recession, the German economy can look forward to a brighter future
The euro zone economy grew 0.6 percent in the third quarter of this year after growth of 0.4 percent in the second quarter, the EU's executive arm said in its quarterly report on the bloc.
The head of the commission's economic affairs department, Klaus Regling, said the euro zone would keep up the pace and predicted that growth in the fourth quarter of 2005 and the first quarter of 2006 "will be centered around 0.6 percent."
"This is marginally stronger than we had forecast in the autumn forecast" published in November, he told a news conference. "We are optimistic about the outlook for growth, growth is accelerating and getting a more solid base," he said, adding that some hoped-for positive factors "may indeed be materializing."
In particular Germany, which is quickly shedding its reputation of recent years for being an economic slowcoach, may post 2006 growth above the commission's forecast of 1.2 percent, he said.
Germany's strong growth was helping to underpin the broader recovery in the euro zone, which would grow 1.3 percent this year and 1.9 percent next year, the commission said, sticking to previous forecasts.
Ifo predicts economy to expand by 1.7 percent in 2006
This comes a day after the Ifo research institute forecast that the German economy, the biggest economy in the 12-nation bloc, is set to expand by 1.7 percent next year, nearly double the expected growth of 0.9 percent this year.
Previously in their joint autumn report, Ifo and its five fellow research institutes DIW, HWWA, IW, RWI, IWH, had been penciling in German growth of 1.2 percent in 2006.
Exports will again drive growth in the German economy in 2006
While growth would once again be driven primarily by exports, private consumption, traditionally the Achilles' heel of the German economy, was expected to pick up in the second half of 2006, Ifo said in its latest updated annual growth prognoses.
Ifo's latest forecast is more optimistic than the German government's official growth forecast of 1.2 percent. "The outlook for the German economy next year remains favorable," Ifo wrote in its latest report. "With the international environment expected to remain favorable, exports will once again be the most important pillar of growth," the think-tank said.
"Investment in equipment will expand noticeably; construction investment will not decline further; and private consumption will also pick up somewhat, particularly in the second half of the year as consumers bring forward purchases ahead of the planned rise in value-added tax (VAT)," it said.
Overall, gross domestic product (GDP) was expected to expand by an annual average 1.7 percent next year and even by as much as 1.9 percent when adjusted for calendar effects such as the fewer number of working days, Ifo said.
Strong investment but effects on unemployment slow
Any signs of recovery in the job market would be slow to appear, Ifo said
But the strong acceleration in growth would need time before it had an effect on the labor market, with the total number of people on the dole expected to top the psychologically important level of five million once again in the winter months, Ifo said.
The average annual jobless total was expected to slip to 4.675 million in 2006 from an anticipated 4.825 million in 2005. And the jobless would slip to 10.7 percent from 11.1 percent, Ifo predicted.
As for Germany's strained public finances, which are currently in breach of EU limits, Berlin would make some progress in curbing its runaway public deficit, the research institute said.
Under the terms of the EU's Stability and Growth Pact, euro zone members are not allowed to run up deficits in excess of 3.0 percent of GDP.
German deficit expected to shrink slowly
But the German deficit ratio has been higher than that every year since 2002. Ifo forecast that the ratio would indeed fall to 3.5 percent in 2005 and then to 3.2 percent in 2006.
The forecasts were made on the assumption that oil prices would average 60 dollar a barrel in 2006 after 55 dollars in 2005 and that the European Central Bank would raise its key rates to 2.50 percent by the summer, Ifo noted.