Economic growth in the euro zone reached an annual rate of 3.4% in the first half of the year, the highest rate for six years, the European Commission said today.
'Domestic demand has finally bounced back and has become the main source of growth. In a context of improving labour market and easing oil prices, the economic outlook could turn out better than expected in the near term,' according to the Commission's quarterly report on the euro area.
'The recovery of the euro-area economy appears to be on solid ground, with GDP growing in the first half of the year at a pace not seen in the last six years,' the report added.
Growth in the 12-nation euro zone is now forecast at 2.5% in 2006, 0.4 percentage points above the spring forecast.
Further ahead, however, the report warns of downside risks, in particular equity price turbulence in late spring indicates 'that risks to growth related to the macro-financial environment have intensified'.
Structural reforms and wage moderation within the 12 nations that use the euro currency have boosted the economy's employment performance.
'Nevertheless, there is scope to further improve the functioning of labour markets. That past efforts are paying off should encourage further steps in the right direction,' the Commission said.
Buttressed by a strong rebound in private investment, domestic demand took over as the main source of strong growth.
With the recent ebbing of oil prices and the gradual firming of the labour market, prospects for private consumption, a particularly weak spot in the euro area in recent years, are also improving, according to the report.
However structural unemployment remains persistently high, the long-term unemployed continue to represent a large share of the total number of jobless, and job creation continues to be dominated by temporary contracts.
'All this calls for member states to step up their efforts,' the Commission warned.
