European economic growth will be better in 2007 than previously predicted, jobs are being created faster than in any year this decade and inflation is likely to remain subdued, the European Commission said yesterday.

However, in its assessment of the Irish economy, the commission warns that it is increasingly at risk from overheating.

With finance ministers meeting in Brussels, the commission published new economic forecasts, raising its prediction for 2006 growth in the 12-country euro zone marginally to 2.6 from 2.5 per cent, and for 2007 sharply to 2.1 per cent from 1.8.

It forecast growth of 2.2 per cent in 2008 in the euro zone and 2.4 per cent in the European Union, roughly on par with US growth forecast at 2.3 per cent, Economic and Monetary Affairs Commissioner Joaquin Almunia said.

The new figures average out at growth of 2.3 per cent a year over the three years of 2006-2008, higher than the 2 per cent level that is generally considered Europe's potential rate.

The upgraded forecasts reflect a brighter view of the European economy, which the commission says is benefiting from strong global demand and internal economic reform.

However, the European Central Bank (ECB) was quick to stress its less benign view of the European inflation outlook, with ECB council member Axel Weber declaring in Cologne that inflation signals at the moment were alarming.

Ireland's growth rate is expected to stay at 5.3 per cent this year and in 2007, before moderating to a rate of 4.3 per cent in 2008.

But the commission also predicts a modest rise in the rate of unemployment over this year, from 4.3 per cent this year to 4.8 per cent in 2008, implying a rise of around 10,000 in the numbers of jobless.

The forecast for Ireland's budgetary balance is for the Government to run surpluses of 0.9 per cent and 0.4 per cent of GDP in 2007 and 2008 respectively, close to the Government's latest forecasts.

However, in a report on the Irish economy contained in the forecast document, the commission warns that this outlook is at risk from the economy's increasing vulnerability.

"The extended residential construction boom and accelerating house prices, coupled with the significant increases in household indebtedness, are noteworthy . . . the macroeconomic risks, if realised, have the potential to worsen the general government balance significantly," the report states.

It warns that "any marked slowdown" in the US economy would also weigh heavily on the situation in Ireland.

Reacting to the figures, Economic and Monetary Affairs Commissioner Joaquin Almunia yesterday said that the EU economy was going through its best phase in a decade.

"This shows the benefits of economic reforms and budgetary consolidation in an environment of a strong global economy," he said. - (Additional reporting, Reuters)