EU Says Its Economic Growth This Year Will Outpace The U.S.

Officials cite domestic demand for turnaround.

BRUSSELS, Belgium (AP) - The European Union will grow faster than previously expected this year, driven by increasing demand at home, and may outpace growth in the United States, the European Commission said Friday.

The Commission said it expects the $14.3 trillion economy of the 27-nation European Union will grow 2.7 percent this year instead of its earlier 2.4 percent forecast. That would top its estimate that the U.S. economy will grow 2.5 percent.

The EU's executive arm also raised its growth forecast for the 13-nation region that uses the euro currency to 2.4 percent from an earlier estimate of 2.1 percent.

''According to our assumptions, the United States will grow this year below the EU growth rate and slightly above the euro area growth rate,'' EU Economic and Monetary Affairs Commissioner Joaquin Almunia told reporters.

This comes after a long period where growth in Europe's economies lagged far behind the rest of the world. The real turnaround was last year, it said.

''2006 was a remarkable year, with growth driven by domestic demand thanks to an improved labor market situation - 3 million jobs created of which 2 million were in the euro area,'' the Commission said.

It also raised its figures for growth last year, saying the euro zone expanded 2.7 percent and the entire EU by 2.9 percent. In November it predicted 2.6 percent growth for the euro zone and 2.8 percent for the entire EU.

Unemployment in Europe - although still much higher than in the U.S. or Japan - hit 7.5 percent in December, the lowest level in a decade. The Commission said it believed reforms to make labor markets more flexible had some effect.

''The fact growth was driven by a marked pickup of domestic demand bodes well for the outlook in 2007,'' the Commission said. ''In particular, the turnaround in the labor market will boost labor incomes and consumer confidence and could turn this upswing into a durable, domestically led recovery.''

Inflation should be 1.8 percent in the euro area this year as oil prices decline, it said.

While euro inflation last year was 2.2 percent - the same as 2005 - this was largely the result of high oil prices, the Commission said, because core inflation was steady at around 1.5 percent. Fears that energy prices would trigger demands for higher wages do not seem to have materialized, it said.

These factors allowed Europe to weather record-high energy prices over the summer and made it more resilient to major influences on global growth, such as the U.S. slowdown that has been milder than expected.

The possibility of a U.S. hard landing has ''clearly diminished'' since November when EU economists rated it the single most important downside risk to European growth.

But they still sounded concern over volatile oil prices and world financial imbalances, saying a sudden shift here could have far-reaching consequences - repeating a worry that the U.S. has not tackled its ballooning fiscal deficit.

They also pointed to the Japanese yen trading significantly below long-term levels, saying this made euro exports more expensive in comparison. Both economies specialize in high-end manufactured goods, giving Japan a clear price advantage where they compete head-to-head.

The EU's interim forecast are based on a survey of its seven largest economies - Germany, Britain, France, Spain, Italy, the Netherlands and Poland - that make up 80 percent of the 27-nation bloc's gross domestic product. It will publish a full forecast covering the entire EU on May 7.

The German economy, Europe's largest, would bounce back from little growth in the start of the year when a sales tax hike bites into shopping habits, the EU executive said, predicting it would grow 1.8 percent in 2007 after 2.7 percent last year.

But France continues to be weak, with GDP stagnating in the third quarter and the economy growing below the euro average at 1.9 percent. EU economists blamed an unexpected decrease in exports, saying France's trend to import more than it sells abroad could also dampen growth this year, even though it should speed up to 2.2 percent.

Spain's long boom gathered pace last year and may have hit 3.8 percent thanks to a housing and shopping boom that has also pushed inflation well above the euro average, the Commission said. It expects a slight slowdown to 3.7 percent this year.

Italy grew at the fastest rate since 2000 last year, at 1.9 percent, but may slow down in the early part of this year hitting 2 percent for the entire 12 months. Britain is expected to grow 2.7 percent in 2006 and 2007, the Netherlands by 2.9 percent last year and 2.8 percent this year while Poland should grow 5.8 percent in 2006 and 6 percent in 2007.

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