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Europe’s economy set for robust growth

Europe’s economy is heading for another bumper year, with 2.7% growth, according to upgraded forecasts published on Friday by Joaquin Almunia, EU monetary affairs commissioner.

Almunia marked up his forecasts amid signs that Germany’s VAT hike on January 1 has failed seriously to dent growth, encouraging signals from the US and new evidence that inflation is under control. Spain and Poland are leading the way among Europe’s big economies, although Germany and Italy both look set to finish 2007 more strongly than previously expected. Almunia said the recovery was „broadly based across the European Union”, fuelled by investment and reviving consumer demand. He is predicting a soft landing for the US economy, assuming growth of 2.5% this year – suggesting he believes the EU could achieve the rare feat in 2007 of outstripping America’s economy. However, he issued his usual health warning about the risks of global imbalances and the possibility of oil volatility. He also warned that the weak yen was hitting the competitiveness of European exports. He said the Japanese currency „seems to trade significantly below its longer-term equilibrium”. However the broad message of his interim economic forecast – which studied the outlook for Europe’s seven biggest economies – was one of continued robust growth, albeit at a slightly slower pace than in 2006.

Growth forecasts for this year were put at 2.7% for the European Union and 2.4% for the 13-country euro area. In both cases the forecasts were raised 0.3 percentage points compared with November projections. There was a significant upgrade for Germany, which Almunia now predicts will grow by 1.8% this year, compared with 1.2% previously. He said he expected growth to „rebound” after the initial shock of a rise in the country’s VAT rate from 16% to 19% in January. Italy, widely seen as the sick man of the eurozone, saw its growth projection upgraded by the same amount, to 2.0%. Britain’s economy was judged by Almunia to be in a „very positive situation”, with growth projected at 2.7% – the same as last year. The best performers were Spain, predicted to grow at 3.7%, and Poland, with 5%. Almunia said he hoped the authorities in Warsaw would now find it easier to make the budget deficit cuts he has demanded. Only France, with growth projected at 2.2%, and the Netherlands, at 2.8%, had their forecasts downgraded. Almunia also lowered his 2007 eurozone inflation forecast, from 2.1% to 1.8%, raising hopes in national capitals that the cycle of interest rate tightening may be coming to an end. (