Euro zone growth at six-year high

The economy of the 12-nation euro zone grew an annual 3.4 percent in the first half of the year, the highest rate in six years, the European Union (EU) said in a report published Monday.

The recovery of the euro-area economy "appears to be on solid ground," as domestic demand has finally bounced back and has become the main source of growth, the EU's executive European Commission said in the Quarterly Report on the Euro Area.

"In a context of improving labor market and easing oil prices, the economic outlook could turn out better than expected in the near term," the report said.

Buttressed by a strong rebound in private investment, domestic demand took over as the main source of growth. With the recent ebbing of oil prices and the gradual firming of the labor market, prospects for private consumption, a particularly weak spot in the euro zone in recent years, are also improving, it said.

Growth in the euro area is expected to remain close to, or above, potential in the second half of the year. This is confirmed by the Commission's September interim forecast which projects euro zone GDP growth at 2.5 percent in 2006, 0.4 percentage point above the Spring forecast, the report said.

However, the report warned that downside risks are set to become more prominent in a longer term. The episode of equity market turbulence in May-June this year shows that downside risks related to the macro-financial environment have intensified both internationally and domestically, it said.

On the international front, large global imbalances, persistent geopolitical tension and stretched asset prices in many markets could lead to a sharper-than-expected slowdown in global economic growth, it said.

On the domestic front, growing household and corporate debt also constitutes a source of vulnerability, it added.

On the labor market, the report said that structural reforms and persistent wage moderation have boosted the economy's employment performance. More than 5 million jobs have been created in the euro zone in the last five years, which is quite remarkable by historical standards.

Nevertheless, the report stressed there is scope to further improve the functioning of labor markets, as structural unemployment remains persistently high, the long-term unemployed continue to represent a large share of the total number of jobless, and job creation continues to be dominated by temporary contracts.

Source: Xinhua