Euro zone economic growth will slow down only slightly in 2007 from last year's six-year high, the European Commission said, raising previous projections and forecasting inflation would fall to match ECB targets.
In its twice-yearly interim projection the Commission said it now expected economic growth in the 13 countries using the euro to be 2.4 per cent this year, down from 2.7 per cent in 2006 but well above its own November 6th estimate of 2.1 per cent.
Inflation, which the European Central Bank wants to keep just below 2 percent, is to fall to 1.8 per cent this year from 2.2 per cent in 2006 - a downward revision of the Commission's November projection that prices would grow 2.1 per cent in 2007.
European Commission
"The European economies performed better than expected in 2006 despite headwinds from high oil prices, tighter monetary conditions and a slowdown of the US economy ," the Commission said in a statement.
"Although moderating somewhat, output growth is projected to remain robust in 2007 ... reflecting a marginally higher carry-over from 2006," it said.
Growth would be driven mainly by domestic demand, with output fuelled by investment and private consumption that will be supported by an improved outlook for real disposable income, boosted by lower inflation and falling unemployment, it said.
Fast global economic growth, which the Commission sees at 5.5 per cent this year, up from 5.1 per cent in 2006, will help.
The ECB, which markets expect will raise interest rates by 25 basis points to 3.75 per cent in March, in December forecast slightly higher inflation this year at 1.5 to 2.5 per cent.
"Higher energy prices kept consumer price inflation above 2 per cent in 2006," the Commission said. "But core inflation, excluding energy and unprocessed food, remained subdued, suggesting limited indirect effects of higher energy prices."
It said it cut its price growth outlook because of the fall of oil prices and the moderate initial impact of the German value added tax hike. The Commission expects a barrel of crude oil to cost $60 this year, $6.5 less than forecast in November.
"Inflation should also remain contained thanks to the pickup in productivity and thanks to the impact of the stronger euro and intense international price competition," Economic and Monetary Affairs Commissioner Joaquin Almunia told reporters.