The European Commission expects Europe's economy to „remain strong” in coming months and inflationary pressures to be eased by the drop in oil prices and the euro's strength, a confidential draft document shows.
While Germany's sales-tax increase on January 1 could „take its toll” on euro-area growth, „economic activity will remain strong in early 2007,” according to the document obtained by Bloomberg News. At the same time, „falling oil prices and an appreciating euro should alleviate price pressures in the near term.” The European Central Bank has signaled it would raise borrowing costs in March for a seventh time since late 2005 to counter inflation. ECB President Jean-Claude Trichet said January 11 that investors' expectations for a March increase may be justified, as the pace of growth gives companies room to raise prices and employees leeway to seek more pay. Bundesbank board member Edgar Meister said in an interview yesterday that the ECB must remain „very vigilant” on price risks in the 13-nation euro region as economic expansion and wage demands could fan inflation. ECB executive board member Juergen Stark, when asked today in Budapest whether be thought borrowing costs are still „low,” said: „It's not a question of belief. It's a fact.”
The commission, the European Union's executive arm, said in the draft document that „wage pressures are likely to become stronger, which eventually could translate into consumer prices.” Euro-area inflation remained at 1.9% in December, below the ECB's 2% ceiling. European Union Monetary Affairs Commissioner Joaquin Almunia said yesterday in Madrid that growth in the euro region this year will come close to 2006's estimated pace of 2.6%, the highest in six years, suggesting the economy can withstand further interest-rate increases. Last year's growth rate was 2.6% „if not more,” he said. „Despite the ongoing withdrawal of monetary stimulus, global financial conditions have remained conducive to growth,” according to the commission document, to be discussed at the January 29-30 finance ministers' meeting in Brussels.
„Low interest rates have also created the conditions for rising asset prices, both for equity and house prices,” the draft said. House prices appear „very richly valued” in countries like Denmark, France, Spain and Ireland, „carrying the risk of a price correction,” the document said. „Such house-price corrections could impact on the economy at large.” The commission in November estimated euro-area growth last year at 2.6%, the fastest pace since 2000, as record-low unemployment helps fuel consumer spending. The December jobless rate „is likely to come in below 7.5%,” which would be the lowest rate since the data were first collated in 1993, the draft document says. For the US economy, „the most likely course of events in 2007 remains a „soft landing”,” the document said. „The risk of further downward pressure on the US dollar remains, not least to the unresolved issue of the US current-account deficit.” US growth should remain in the range of 2% to 3% in the first half of 2007, before accelerating to slightly above 3% in the rest of the year, according to the document. (Bloomberg)