Better Than Expected
February 16, 2007
Despite the rosier outlook, the figure released Friday would still mark a slight slowdown from the 2.7-percent growth registered in 2006, which was the strongest the euro zone has seen since 2000.
The European Union's executive arm also predicted that the combined economy of the 27 EU nations as a whole would grow 2.7 percent this year, up from an estimate of 2.4 percent previously.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia said that improved growth prospects could not only be put down to favorable macroeconomic conditions but that painful reforms were paying off.
"The European economy has done remarkably well in 2006 and is set to continue to grow briskly in 2007," he said. "This is not only due to the favorable cyclical conditions. It also reflects an increased resilience of the European economy and shows that the economic reforms already carried out were worth the effort," he added.
Looking more closely at expected 2007 growth trends, Almunia said he expected "temporary slowdown" in the first quarter due to an increase in German value-added tax to 19 percent from 16 percent.
The commission forecast quarterly euro-zone growth of 0.3 percent in the first three months of the year, doubling to a rate of about 0.6 percent for the following quarters.
Inflation prospects better, too
Not only were growth prospects looking better, the European Commission also expected inflation to be lower than when it last issued economic forecasts in November.
The commission predicted that annual inflation would be only 1.8 percent this year, down from a November forecast of 2.1 percent and spot on the European Central Bank's preferred level of close to but less than two percent.
Almunia said that the lower inflation expectations were based on a lower oil price forecast of $59.90 dollars a barrel instead of $66.30 previously and a lower impact from the increase in German VAT.
Optimistic about Germany, Italy
The commission was particularly optimistic about the growth outlook for Germany, raising its 2007 forecast for Europe's biggest economy to 1.8 percent from 1.2 previously.
"The revised growth figures suggest that, on the back of booming exports, a solid increase in capital formation (investment) and a better functioning labor market, the underlying expansion in economic activity has been more robust than was expected," the report accompanying the forecasts said.
The commission was also upbeat about the prospects for Italy, which had gained the reputation in recent years in economic circles of being the "sick man of Europe" because of its sluggish performance.
It forecast that Italy, with the third-biggest economy in the euro zone, would grow 2.0 percent this year, up from a November estimate of 1.4 percent.
Cloud over France
However, it cast a cloud over the outlook for growth in France as the country prepares for presidential elections in May, trimming its forecast to 2.2 percent from 2.3 percent previously.
Outside the euro zone, which last month welcomed 13th member Slovenia into its ranks, it estimated that the British economy would grow 2.7 percent, up slightly from a forecast of 2.6 percent in November. It also raised sharply its Polish growth estimate to 6.0 percent from a forecast of 4.7 percent previously.
The estimates were interim forecasts aimed at giving an idea of where the European economy is going between the publication of more complete predictions in November and May.