The euro zone economy is likely to grow almost twice as fast this year as previously thought, the European Commission forecast on Monday, mainly because of much stronger growth in its biggest economy Germany.
In its twice-yearly interim economic forecasts for the 27-nation EU and the 16 countries using the single currency, the EU executive said it now expected the euro zone to grow by 1.7 percent this year, rather than the 0.9 percent it forecast in May and up from a 4.1 percent contraction in 2009.
The Commission forecast is roughly in line with the latest projections of the European Central Bank which said on Sept 2 it expected euro zone growth to be between 1.4 and 1.7 percent this year.
The Commission said risks to its forecasts were broadly balanced but the resurfacing of global imbalances, high debt levels and lingering tensions in sovereign debt markets were among the factors weighing on the outlook.
"The European economy is clearly on a path of recovery, more strongly than forecast in the spring, and the rebound of domestic demand bodes well for the job market," Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
"However, uncertainties remain and safeguarding financial stability and continuing fiscal consolidation remain key priorities."
He called for frontloading structural reforms to help sustain growth and job creation as the euro zone economy emerges from a deep slump caused by the financial market crisis.
The Commission forecast that in the third and fourth quarter of 2010, the euro zone economy would grow 0.5 percent quarter-on-quarter and 0.3 percent respectively after a 1.0 percent expansion in the second quarter.
"The contribution of private investment and consumption to GDP growth in the second quarter of 2010 exceeded the combined contributions of inventories and net exports," the Commission said.
"This rebalancing is encouraging, especially as the weaker external environment in the second part of the year is set to have a dampening effect on EU export growth," it said.
The EU as a whole is also likely to see much stronger economic expansion of 1.8 percent in the whole of 2010, rather than the 1.0 percent estimated in May and up from a 4.2 percent contraction in 2009, the Commission said.
The Commission almost tripled its forecast for German gross domestic product growth to 3.4 percent from 1.2 percent for 2010 and raised its projections also for France, Italy and the Netherlands and saw a smaller economic contraction in Spain.
Despite the stronger growth, the euro zone was likely to see slower prices growth than previously expected, the Commission said.
It forecast euro zone 2010 inflation at 1.4 percent year-on-year, down from 1.5 percent seen in May, although up from 0.3 percent in 2009.
This is below the inflation forecasts of the ECB, which expects consumer prices to grow 1.5-1.7 percent this year — in line with its target of below, but close to 2 percent.
"The remaining slack in the economy, subdued wage growth and low inflation expectations should keep inflation in check, notwithstanding recent exchange-rate developments and weather-related price rises in some agro-commodities," it said.
The Commission projections show inflation would be slower than forecast in May in Germany, Italy and the Netherlands but slightly higher in France and the same as previously thought in Spain.
