EU Commission Upgrades German and EU Growth Forecasts

Brussels is softly predicting that growth for 2006 in the EU -- and also in Germany, Europe's largest economy -- will be better than expected, according to a new report by the European Commission.

The commission upgraded the forecast for German growth to 2.2 percent for 2006, up from an earlier prognosis of 1.7 percent. It has also increased its forecast for the euro-zone economies this year to 2.5 percent from 2.1 percent and for the 25-nation EU to 2.7 percent from 2.3 percent.

The reason for the upgrade was stronger-than-expected growth in the first six months of this year, EU sources told the German newspaper Handelsblatt.

The EU's statistical agency Eurostat has also signaled stronger growth across the bloc, with second quarter growth in 2006 expected to be 0.9 per cent higher than during the same period last year. Eurostat said first quarter 2006 growth stood at 0.8 per cent.

Private and public economists were caught off guard by the euro zone's surprisingly strong growth in the first half of the year -- the fastest rate in five years, which is expected to underpin strong performance for the whole of 2006.

"One has to go back a long time to see such good quarterly growth figures," an EU official told German news agency DPA.

Taking the pulse

EU finance ministers are to take the pulse of their combined 25-nation economy when they meet Friday, with a growing number are worried that growth has passed its prime, officials said.

"Following surprisingly strong GDP (gross domestic product) growth in the first half of 2006, the euro-zone economy looks set to return to a less exuberant pace of growth," Holger Schmieding, an economist for Bank of America, told AFP.

Meeting in Helsinki for two days of talks also attended by European Central Bank governors, the ministers are also likely to voice concerns about the impact of higher interest rates on growth.

Given the strong growth in the euro zone, the European Central Bank has steadily raised its interest rates since December to keep inflation in check, judging that bloc's economy is strong enough to cope with higher borrowing costs.

But because headline inflation has been driven up almost exclusively by high oil prices, some economists and finance ministers do not share the ECB's view that higher interest rates are needed to keep inflation down and fear they will hold back investment and consumption and boost the euro.

Germans optimistic

The ministers will also have a chance to chew over new forecasts from the Organization for Economic Cooperation and Development (OECD) which said on Tuesday that the bloc would see growth this year of 2.7 percent after benefiting in the second quarter from a one-time effect from the soccer World Cup, spending in the German construction sector and falling unemployment.

Ministers are expected to also discuss how volatile oil prices, a cool-down in the US economy and Germany's 3 percent rise in value added tax (VAT) to 19 percent could prevent a rapid EU economic recovery.

But the news from Berlin make people optimistic: Due to higher than expected tax revenue, Germany is expected to post a budget deficit of just 2.8 per cent this year, below the euro zone's 3 per cent of GDP budget deficit limit.

"We are experiencing a classic economic upswing," said German Finance Minister Peer Steinbrück.