Europe 'will outpace UK economy in 2006'

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The Independent Online

The eurozone economy will outpace Britain's for the first time in a decade, according to a report that raises the prospect that 2006 will be the year for recovery in the struggling 12-nation single currency zone.

The mountain of consumer debt and weak business investment will hold the UK back, allowing the eurozone's export performance to help it overtake, Oxford Economic Forecasting (OEF) said today.

It said it expected growth of 2.2 per cent in the eurozone compared with 2.1 per cent in the UK, which would be the first time the larger economy has surpassed its rival since 1995.

In its report, the OEF says companies on the Continent, particularly Germany, were benefiting more than the UK from the strong demand from China and other Asian economies. "Our relative optimism about the outlook for Europe also reflects a genuine improvement in business confidence and an acknowledgement of the new German government and its reform agenda," it said.

"Moreover, Continental demand is also likely to be boosted in 2006 by the pre-announced German VAT increase scheduled to come into effect in January 2007 in an effort to improve the fiscal position." It said it was highly likely consumers would bring forward some spending on high-value durable goods to avoid the levy.

German growth is forecast to double from last year's 1.0 per cent to 1.9 per cent in 2006.

But OEF warned the Continent's supremacy would be short lived as further rate rises by the European Central Bank would curb growth, while the Bank of England cut rates to offset the slowdown in the UK.