The EC noted that the upward revision in outlook is partly due to solid growth in 2006, the strongest in six years. Growth remains driven by dynamic domestic demand and brisk investment growth.
The growth rate for the 13-nation economy is projected to ease to 2.5% in 2008. The EC stated that the easing in growth is expected to emerge partly on account of sluggishness in external demand.
Overall, the EU27 is expected to grow at 2.9% in 2007, revised up from 2.7% estimated earlier. The growth forecast for 2008 is pegged at 2.7%.
Inflation is expected to come in at 1.9% in 2007, revised up from 1.8% predicted in February. In 2008, consumer prices are expected to rise at the same pace of 1.9%.
In Germany, the largest Eurozone economy, the impact of the VAT hike is expected to temporarily dampen housing investment in 2007, though less than earlier forecasted. The EC expects the negative impact of VAT hike on private consumption to be eclipsed by the impressive labor market recovery.
During the 2007-08 period, a total of 5.5 million new jobs are expected to be created in the EU and 3.8 million in the Euro area. The jobless rate is predicted to ease further to touch 6.7% in the EU and 6.9% in the euro zone by 2008, which according to the EC are levels not known since the early 1990`s. Wage growth is expected to remain moderate during the forecast period against the backdrop of firming labor productivity growth. This is expected to help inflation stay near 2%, the European Central Bank`s tolerance level.
The EC stated that the negative risks to its Spring growth forecast include a more marked slowdown in the US housing market and further increase in oil prices.
Results of a private survey, released Monday, revealed positive readings for the economy of 13 nations that follow the euro currency. The overall index of investor opinion for the Euro zone hit an all time high of 40.8 points in May, the SENTIX monthly survey showed. The index climbed from its prior record of 34.7 logged in April. The jump in the reading indicates that investors` expectations for the 13-nation economy improved very clearly in May.
The SENTIX survey is carried out among 2,400 people, out of which more than 510 are institutional investors. The survey quizzes the participants about their opinion on ten different markets. In May, 97% of survey participants assessed the economic situation as favorable, the German research group said.
The gauge for economic expectations under the survey climbed to 18.75 in May from 13.25 in the prior month. The latest reading is the highest since May 2006. The measure for current situation surged to a record high of 65.00 from 58.25 in the previous month.
Later in the week, The European Central Bank - ECB is widely expected to stay pat on interest rates. The ECB may hold the main refinancing rate at 3.75% on Thursday, while the ECB chief Jean-Claude Trichet is expected to signal a hike in June with his code words - “strong vigilance”. Trichet commented in the press meet that followed April decision that he would do nothing to alter market expectations for two months ahead, meaning he was comfortable with market expectations.
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