The euro zone economy will expand at the fastest rate this year since the turn of the century and the good times will continue in the coming years despite a slight slowdown in 2007, the European Commission forecast today.
Lifting past forecasts, the European Union's executive arm estimated that economic growth in the 12 nations sharing the euro would reach a rate of 2.6% this year before slowing to 2.1% in 2007.
Previously, the European Union's executive arm had predicted that growth would reach 2.5% in 2006 and 1.8% in 2007. It decided to lift its estimates after a surprisingly strong performance in the first half of the year.
Meanwhile, the combined economy of the 25-nation EU is also enjoying the strongest growth in six years and is on course to expand 2.8% in 2006 and 2.4%in 2007, the commission estimated in its autumn economic forecasts.
The Commission predicts that the Irish economy will grow by 5.3% this year with a similar growth forecast for 2007.
The figures mark a sharp improvement from last year, when the euro zone economy grew only 1.4% and the EU economy expanded 1.7%.
'After years of disappointing results, the European Union economy in 2006 will be at its best since the beginning of the decade and is expected to grow at around potential in 2007 and 2008,' EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.
Booming business investment and gradually rising consumer spending were fuelling the current economic boom, which would cool slightly next year because of higher taxes in some big member states and slower global growth, particularly in the US.
Despite the expected slowdown next year, the commission forecast that European economic growth would hold steady around its potential of 2.1-2.2% for the euro zone and 2.4% for the EU, signalling that good times are here to stay for at least the next couple of years.
The improving economic conditions would help bring down Europe's stubbornly high unemployment with five million jobs expected to be created in the euro zone over the 2006-2008 period and another two million jobs in the EU.
That would bring the euro zone unemployment rate down from 8% this year to 7.7% in 2007 and 7.4% in 2008 while EU unemployment would ease from 8% in 2006 to 7.6% in 2007 and to 7.3% in 2008.
Meanwhile, annual inflation would stand at 2.2% this year before easing to 2.1% next year in the euro zone, slightly above the European Central Bank's preferred level of close to but less than 2%.
Core inflation, which excludes volatile items such as oil prices, would remain 'subdued'. The commission forecast that oil prices would average about $65.6 a barrel this year before rising to $66.3 in 2007 and $68 in 2008.
While interest rate conditions would remain 'benign', the commission sounded a note of caution about high household debt levels in some member states such as Ireland, Spain, the Netherlands and Portugal, which could be hit hard by higher interest rates.
However, government finances were proving to be stronger than expected thanks to booming tax revenues. The average public deficit in both the EU and euro zone was expected to stand at 2% of gross domestic product this year.
Nevertheless, the Czech Republic, Hungary, Italy, Portugal and Slovakia were on course for deficits this year greater than a limit of 3% of GDP allowed by the EU's fiscal rulebook.
