European Growth Still Lagging U.S.

Eurozone growth is predicted to be 2.6%.

With unemployment at a record low, inflation tame, and confidence high, the European economy started 2007 on a firm footing, helping the continent narrow its long-standing growth gap with the United States. While first official estimates are not due before mid-February, the European Commission has said eurozone growth last year was at least 2.6% and would likely be nearly as high this year.

After growth of only 1.4% in 2005, the upturn is helping Europe put in a more respectable performance compared to the U.S. after lagging the fleet-footed U.S. economy for years. But U.S. data published Jan. 31 showed that the U.S. continues to outpace Europe by a comfortable margin. U.S. economic growth reached 3.4% last year, while expansion of 3.5% in the final quarter beat Wall Street analysts' expectations for only 3%.

Over the long term, the U.S. is likely to keep its growth lead, especially as Europe's aging population and limited immigration keeps the number of active workers down. But in the short term, Europe's growth prospects are looking up.

After a particularly strong showing in 2006, the 13 countries sharing the euro were expected to see growth slow this year, in part due to an increase in German value added or sales tax (VAT) and a U.S. slowdown. But a barrage of data published Jan. 31 showed that the VAT hike in Germany, Europe's biggest economy, has had only a negligible effect while U.S. growth is proving stronger than expected. As a result, many economists now expect any slowdown in European growth to be relatively small.

Against expectations of a rise, Eurozone inflation held steady in January at 1.9% compared to December despite an increase in German VAT rom 16 % to 19%, according to a first estimate from the EU's Eurostat data agency on Jan.31.

Meanwhile, Eurostat also published data showing eurozone unemployment, long a major problem for the bloc's politicians, fell in December to 7.5%, the lowest level since EU records began in 1993.

Copyright Agence France-Presse, 2007

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