The Organisation for Economic Co-operation and Development (OECD) today raised its forcast for the euro zone and predicted further interest rate rises.
The OECD highlighted Europe's German-led recovery and also a surprise rebound in Italy in raising its forecasts for the 13-nation euro currency area as a whole to 2.7 per cent this year followed by a more moderate 2.3 per cent in 2008.
Unemployment is falling, and central banks need to remain on guard as inflation risks mount due to increases in the cost of food, commodities and shipping, the OECD said in a twice-yearly report on international economic prospects.
"The current economic situation is in many ways better than what we have experienced in years," chief economist Jean-Philippe Cotis said.
The OECD said it expected the European Central Bank to raise its key interest rate twice more this year, to 4.25 per cent. The OECD saw those rises coming in June and late 2007 followed by a pause in 2008.
Unemployment was set to fall in Europe to 6.7 per cent from 7.1 in 2006 and 7.8 in 2005, the body predicted.
The OECD lowered forecasts for the United States but said it believed the US slowdown, caused by a slump in the housing market, would not sink the world's largest economy.
It dropped its 2007 growth forecast for the United States to 2.1 per cent from 2.4 per cent previously but predicted a recovery to growth of 2.5 per cent in 2008, after 3.3 per cent in 2006.
China, the world's fourth largest economy, was headed for another runaway year of growth topping 10 per cent and "may have exceeded the speed limit", said the OECD.