German growth helping EU's economic outlook

8th May 2006, Comments 0 comments

8 May 2006, BRUSSELS - The European Commission on Monday unveiled upbeat economic forecasts for the 12-nation eurozone and the wider European Union, saying growth was being bolstered by domestic demand and investments as well as rising exports.

8 May 2006

BRUSSELS - The European Commission on Monday unveiled upbeat economic forecasts for the 12-nation eurozone and the wider European Union, saying growth was being bolstered by domestic demand and investments as well as rising exports.

The commission - the EU's financial watchdog - said eurozone economies were set to grow by 2.1 per cent in 2006, up from 1.3 per cent last year. It added that growth in the 25-nation EU would rise to 2.3 per cent in 2006, up from 1.6 per cent last year.

An improving economic outlook in Germany - the EU's largest economy - was contributing to the EU economic rebound, said the commission in its latest economic forecasts.

EU monetary affairs chief Joaquin Almunia said he expected the German economy to grow by 1.7 per cent in 2006, nearly double the 0.9 per cent rise last year.

"Both the EU and the euro area are expected to grow markedly stronger this year," said Almunia.

But while the new figures confirmed signs of Europe's improving economic climate, Almunia warned that high oil prices continued to cast a grim shadow over the bloc's growth prospects.

He also urged governments to continue financial reform and fiscal consolidation efforts, saying that of the five eurozone countries which have run up excessive budget deficits, only Germany was set to be in compliance with the bloc's fiscal rules in 2007.

While Berlin's budget deficit was set to fall to 2.5 per cent of Gross Domestic Product (GDP) in 2007, France, Italy, Greece and Portugal would continue to be in breach of the eurozone stability pact which sets a 3 per cent of GDP ceiling on government budget deficits, Almunia warned.

"When growth is perking up...we must not forget to pursue fiscal consolidation," Almunia advised European governments.

The EU monetary affairs chief cautioned that eurozone growth would drop slightly to 1.8 per cent in 2007 while EU economic growth would fall to 2.2 per cent next year.

He also pointed out that other world regions were continuing to outperform Europe. The commission report set world growth in 2006 at 4.6 per cent, falling to 4.3 per cent next year.

The report forecast a US growth rate of "around 3 per cent" and said Asia's emerging economies would notch up growth rates at above 7.5 per cent. Even Japan would do better than the EU, with growth rates of 2.8 per cent in 2006 and 2.4 per cent in 2007.

The biggest threat to the EU economy came from high oil prices and the risk of further oil price increases, the commission warned, adding: "The very low spare capacities make markets extremely vulnerable to actual and potential supply disruptions."

A "disorderly correction of global current account imbalances" - a reference to the high US budget deficit figures and Asia's large trade surpluses - also posed a risk.

Identifying the factors underpinning Europe's long trek out of economic stagnation, Almunia said the current recovery was being bolstered by a strengthening of domestic demand and investment in equipment.

Exports will also continue to be supported by the strong expansion of the world economy and gains in competitiveness of EU companies in some member states, he added.

As a result of the brightening economic outlook, Europe's high jobless figures were improving, Almunia said, adding that the EU was expected to create 3.6 million new jobs over the period 2006-2007, of which 2.4 million would be in the euro area.

The decline in unemployment will continue to be gradual, however. After peaking at around 9 per cent in 2004, the unemployment rate is expected to fall to just above 8 per cent in 2007 in both the EU and euro areas.

Inflation is expected to stay stead at 2.2 per cent in both the EU and the euro area.

While Germany won EU plaudits for being on track to cut its excessive budget deficit to 2.5 per cent next year from 3.5 per cent currently, Almunia said France, Italy, Greece and Portugal were still expected to be in breach of eurozone fiscal rules next year.

Almunia warned, however, that without any policy changes, France - would run up a budget deficit of 3.1 per cent of GDP in 2007, up from 3 per cent this year. He said the Greek budget deficit would rise to 3.6 per cent of GDP in 2007, compared to 3 per cent of GDP this year.

Italy's budget deficit would increase to 4.5 per cent of GDP in 2007, up from 4.1 per cent currently and Portugal's budget deficit would fall to 4.9 per cent next year, down slightly from 5 per cent this year, Almunia added.

Failure to comply with the eurozone stability pact can - in theory - lead to financial sanctions against governments. However, no country has so far had to pay such fines.

DPA

Subject: German news

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