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ECONOMIC OUTLOOK : EU GROWTH FORECASTS OF 2006 REVIEWED UPWARDS.

Though still two times lower than the projected global growth in 2006 (5.5%), interim economic forecasts presented by the European Commission on 6 September nevertheless raise estimates of anticipated growth in the EU. Economic activity is forecast to grow by 2.7% across the entire EU this year and by 2.5% in the eurozone (the Commission's spring forecasts anticipated growth rates of 2.3% and 2.1%, respectively). The EU economy should thus continue to grow above its potential throughout the year in spite of an 80% increase in oil prices since the beginning of 2005. It is in any event necessary to look back as far as the year 2000 to find comparable growth rates (growth in the eurozone did not exceed 1.4% in 2005).

Looking at the details, Germany is forecast to register a record growth of 2.2%, compared with an initial forecast of 1.7%.aEconomic and Monetary Affairs Commissioner Joaquin Almunia acknowledges that the trend confirms a relative anticipation of the increase in VAT rates in Germany from 1 January 2007. Nevertheless, Mr Almunia is confident "the impact on growth in 2007 will be neutral" in spite of a slight weakening at the beginning of the year. Regarding France,the new estimates project growth of 2.3% (compared with 1.9% forecast last spring). This is a very encouraging trend, supported by "buoyant domestic demand".

In Italy, in spite of a slight weakening of GDP over the final quarter, the Commission is predicting GDP growth of 1.7% in 2006 (compared with 1.3% forecast last spring) which, according to the commissioner, should help the government in its efforts to consolidate public finances. This against the background of fresh calls in Italy for a further stay ofexecution for Italy to bring its deficit below the 3% ceiling.

Growth will be highest in Spain in 2006 (3.5%, compared with 3.1% forecast last spring). This is a "very encouraging trend" supported by the construction sector.

The United Kingdom is also set to fare well (2.7%, compared with 2.4% forecast last spring).

Finally, growth in Poland is projected to reach 5% in 2006. Asked about the budgetary situation in the country (the excessive deficit is not likely to be brought below 3% before 2007), Mr Almunia indicated that he is due to meet with the Polish authorities on 8 September in Helsinki on the fringes of the informal EcoFin Council. "I hope then to have a clearer vision of the government's intentions," he indicated.

A consequence of the economic recovery, unemployment rates in the member states should fall from 8% to 7.8% in the eurozone. Interim economic forecasts (official autumn forecasts will be published on 6 November)also anticipate an inflation rate of 2.3% across the EU (eurozone included). These hypotheses are based on oil trading at US$73 a barrel and euro/dollar exchange rates remaining at their current level.

WARNING

In spite of these encouraging economic results, Joaquin Almunia has nevertheless once again urged wage restraint (with trade unions beginning to move in several countries to demand a re-evaluation of wages). The objective is to avoid an inflationary spiral that would undermine growth in the medium term.

The commissioner has also held back from any premature triumphalism regarding 2007, recalling that a number of risks continue to hang over the European economy. In view of a possible slowdown of the US economy, current regional conflicts (which might spark further increases in oil prices) and global imbalances, euphoria is not yet on the agenda, although the EU would appear for the present to be in relatively good shape.

The Commission's complete report is available at www.europolitics.info => members => advanced search => reference = 58953
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Publication:European Report
Geographic Code:4E
Date:Sep 7, 2006
Words:625
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