The European Commission raised on Monday its 2006 economic growth forecast for the eurozone, citing a stronger German economy, robust investment and world growth despite expensive oil, but it cut its view for 2007.
In a twice-yearly economic forecast for countries in the European Union, the EU executive said growth in the 12-member eurozone would accelerate to 2.1 percent this year from 1.3 percent in 2005, up from a previous forecast of 1.9 percent.
The Commission's forecast is in line with the mid-point of the growth range forecast by the European Central Bank.
"Economic growth in 2006 will be underpinned by a strengthening of domestic demand, particularly investment in equipment," the Commission said in a statement, adding soaring energy prices were the main external risk to the forecast.
"Exports will also continue to be supported by the strong expansion of the world economy and gains in competitiveness of EU companies in some member states," it said.
It saw growth in the first quarter of this year doubling quarter-on-quarter to 0.6 percent and remaining at that level for all four quarters of this year.
The EU's statistics agency is due to release its first estimate of growth between January and March on Thursday. For the whole of the EU of 25 member states, the Commission raised its growth forecast to 2.3 percent this year from 1.6 percent in 2005 and up from a previous forecast of 2.1 percent.
That would still be half the world growth rate of 4.6 percent in 2005 and 2006, as forecast by the EU executive.
Europe's biggest economy Germany will be the main driver of growth as its expansion will almost double this year to 1.7 percent against 0.9 percent in 2005, the Commission said.
But a slump in German growth to 1.0 percent in 2007 due to a Value Added Tax increase will also pull down the growth rate of the whole eurozone to 1.8 percent, the Commission forecast, cutting its November projection of 2.1 percent growth next year.
Despite expensive oil, which the Commission sees at $68.9 per barrel in 2006 and $71.0 in 2007, annual inflation in the eurozone is to remain at 2.2 percent in both years, just above the ECB's target of below, but close to 2 percent.
Economists expect the ECB to raise interest rates from the current level of 2.5 percent to 3.25 percent at the end of the year to stem inflationary risks from expensive energy and fast credit growth. They expect the next rate rise in June.
The ECB wants to prevent expensive energy from triggering price rises in other sectors and boost wage demands, a scenario the Commission said could not be ruled out even though there were no signs of it so far.
"Indirect effects on inflation, as firms adjust prices to reflect higher input costs of production, and second-round effects through higher wage demands have been subdued so far but could still surface, with implications for inflation and monetary policy," the Commission said.
The Commission forecast unemployment to ease to 8.4 percent this year from 8.6 percent in 2005 and drop further to 8.2 percent of the workforce in 2007 - an improvement which will help boost consumer confidence, long the weakest point of the eurozone economy.