The slowdown evident in the European economy is well and truly over, the European Commission said yesterday in its autumn economic forecasts.

Growth is expected to rise from 2.1 per cent this year to 3 per cent for the next two years as the international environment continues to improve, particularly those regions most affected by the Asian crisis. The economies outside the EU are expected to grow by as much as 3.7 per cent in 2000 and 3.9 per cent in 2001.

The Commission has also revised upwards its forecasts for expansion in the UK, Spain, France, the Netherlands, Finland and Sweden.

GDP growth in the Irish economy is expected to remain very strong although tailing off somewhat - 7.8 per cent this year, 6.9 per cent next and, assuming unchanged policies, 5.8 per cent in 2001. Irish employment growth is expected to fall from the current 4.2 per to 2.4 per cent in 2001, although unemployment will continue to decline from 6.4 per cent now to 5.5 and then 4.9 per cent.

"As the economic expansion enters a more mature phase, the composition of growth is expected to change in favour of domestic sources. All of the domestic sectors of the economy are expected to perform strongly in the forecast period."

A slight increase from 2.3 to 2.5 per cent in domestic inflation next year is forecast, falling back to 2.1 per cent in 2001. General government net lending should increase continuously from 2.9 per cent to 3.2 per cent over the same period and the national debt decline from 47 per cent of GDP to 37 per cent.

The European inflation experience has not been helped by the growing buoyancy in the world economy and particularly both exchange rate problems and the recovery in commodity, specifically oil prices, which doubled from €10 (£7.88) to €20 (£15.75) a barrel between the turn of the year and October.

The report says the significant but diminishing differences between inflation rates in the euro zone member states are warranted as measures of differences in economies and should not be seen intrinsically as matters of concern. Headline rates vary from 0.75 per cent in Germany, France, and Austria to close to 2.5 per cent in Spain and Ireland.

The report warns that "in some cases, sustained inflation differentials could lead to competitive imbalances over time. In such cases, structural (in particular labour market reforms) or budgetary policy responses might well be warranted". Presumably, in the Irish case, the latter.

"Symptoms of overheating are expected to become increasingly evident. However, the small size and openness of the economy should ensure that these symptoms are reflected more in a weakened external performance than in severe upward pressure on domestic final prices."

Despite the expected continuation of wage agreements "substantial wage drift can be expected as labour demand is high". House price inflation is unlikely to decelerate sharply, "but should ease as the structural imbalance between supply and demand is gradually reduced".

The overall prognosis for the EU was good. "We are now in a period of firm economic recovery" that would be "lasting and sustainable", the Commissioner for Economic Affairs, Mr Pedro Solbes, told journalists, even hinting at an ability to loosen the reins on the spending front. He said member-states could afford to be a bit more ambitious in reducing their fiscal deficits or with job incentives such as tax cuts.

Both EU exports and imports are expected to grow between 6 - 7 per cent over the next two years, as is equipment investment, underlining the importance to the EU of a new liberalising trade round at the WTO. Private consumption within the EU is expected to rise by about 3 per cent a year, with wages up by 1 to 1.5 per cent a year.