Economic growth in the euro zone will accelerate this year more than previously expected while inflation will slow and unemployment fall, European employers group UNICE predicted today.
But rising oil prices and global current account imbalances could batter the dollar and undermine that view, UNICE said in a twice-yearly survey, adding that the potential bursting of a housing-price bubble and bird flu were also concerns.
The European Central Bank, which has already raised interest rates twice since December to stem inflationary pressures from fast credit growth and high oil prices, should raise rates again only if domestic demand picks up, UNICE said.
"The economic upturn in the euro area is expected to be modest and the dampening impact of higher interest rates might be amplified by risks of renewed appreciation of the euro," it said.
"With inflation expected to remain broadly constant at about 2 per cent, future interest rate hikes should go hand in hand with more convincing signs of an acceleration in domestic demand."
UNICE sees inflation at 2.1 per cent this year, down from 2.2 per cent in 2005 and easing to 2.0 per cent in 2007. The ECB wants to keep consumer price growth below, but close to, 2 per cent.
The lobby, which groups 20 million European companies, said it was deeply concerned about budget deficits in many European Union countries, as an ageing society would put additional pressure on the public finances of the bloc in the future.
"Governments should not further delay the necessary adjustments, and take advantage of the ongoing recovery to consolidate public expenditures and strengthen long-term fiscal positions," UNICE said.
Despite some progress in 2005, 12 out of the EU's 25 members are running deficits in excess of the bloc's permitted ceiling of 3 percent of gross domestic product.
UNICE said Europe's slow economic expansion, compared to that of the United States or Japan, came from slow productivity growth since the mid-1990s.
The inflexibility of many European labour markets and the resulting persistently high unemployment is another reason why economic growth is slow, the report said.
Nevertheless, UNICE saw the unemployment rate in the euro zone declining to 8.5 per cent this year from 8.9 per cent in 2005 and falling further to 8.4 per cent in 2007.