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EU lifts forecast for economic growth

Europe's economy will grow next year faster than previously estimated as a decline in oil prices leaves companies and households with more money to spend, the European Commission predicted.

The dozen-nation euro region's economy will expand 2.1% in 2007, the Brussels-base commission said, faster than the 1.8% forecast in May. Growth may reach 2.6% this year, which would be the fastest pace since 2000. Inflation will slow to 2.1% in 2007, below its prediction of 2.2% made in May. The 24% decline in oil prices from a July record lifted European business confidence to a five-year high in October, suggesting the region will cope with a slowdown in the US in 2007. With the commission also forecasting growth will gather momentum in 2008, the economy may be able to withstand further interest-rate increases from the European Central Bank. „The ECB is getting more confident that the region has more momentum,” said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Group Plc in London. „The direction for interest rates next year continues to be upwards.” The commission says the economy will expand 2.2% in 2008. A barrel of oil was worth $58.89 in London yesterday, down from its record of $78.40 on July 14. The commission predicted it will average $68 in 2007 after $66.30 a barrel this year.

„Chances are that oil prices could fall further over the forecasting period, which would evidentially be beneficial for the purchasing power of households and profit margins in the corporate sector,” the commission said. A US slowdown and a planned tax increase in Germany will nevertheless hurt the economy next year, the commission said, and economic reports published yesterday already point to a European slowdown. German manufacturing orders dropped the most in more than a year in September from a month earlier and growth in Europe's services industry unexpectedly slowed in October. ”The growth peak is clearly behind us,” said Sylvain Broyer, an economist at Ixis CIB in Frankfurt. Manufacturing in the US, which buys one-fifth of European exports, expanded at the slowest pace since 2003 in September and growth in the third quarter was the weakest in more than three years. Also dimming the outlook for Europe's exports, the Japanese yen has dropped 7% against the euro this year, a move the commission said „contrasts with what real exchange rate indicators would suggest.” European finance ministers recently urged Japan to let the yen appreciate as they seek to protect exports. The yen was at 150.28 per euro yesterday.

In Germany, Chancellor Angela Merkel's plans to raise a sales tax to 19% from 16% in January are damping the outlook for consumer confidence in Europe's largest economy. Retail sales fell the most in more than two years in September. The growth and inflation outlook nevertheless give the ECB scope to further raise borrowing costs. HeidelbergCement AG, Germany's biggest cement maker, said yesterday „the economic upturn accelerated significantly, particularly in the euro zone.” President Jean-Claude Trichet on November 2 pledged to show „strong vigilance” on consumer prices. Trichet has used the phrase to signal each of the ECB's past five rate increases in the past year as the central bank took its benchmark to 3.25% from a six-decade low of 2%. The commission, which expects inflation to slow below the ECB's 2% limit in 2008, said yesterday the price outlook could still „turn out less benign” than currently projected. Investors expect the ECB to raise its key rate to 3.75% in the first half of next year, futures trading shows. The yield on the three-month Euribor futures contract for June was at 3.95% at 2:15 p.m. in Frankfurt yesterday, up from 3.84% from November 1. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999. (Bloomberg)