The euro-zone economy hit rock bottom in the first half of 2005, with the whole year's growth rate averaging at just 1.3 percent. It is not only far short of last year's 2.1 percent, but also lower than 1.6 percent expected last April for the 12 EU nations that share the euro.
But despite the sluggish economy, the European Commission philosophically sees the year-end situation as a case of all's well that ends well, as 2005 has been beset by soaring oil prices, a slowdown in global growth and weak domestic demand.
In its Economic Forecasts published this month, the Commission, which is the executive arm of the European Union (EU), said euro-zone growth accelerated in the second half of 2005, and will hit 1.9 percent and 2.1 percent respectively in 2006 and 2007.
"SOFT PATCH"
The unexpected downturn in 2005 was "mainly due to the price of oil," according to EU Monetary Affairs Commissioner Joaquin Almunia.
He said the EU economy hit a "soft patch" in the second half of 2004 that extended into the first half of 2005 as oil prices began to soar.
Oil prices rose "by US$10 a barrel in the spring and have since risen by another US$10 per barrel, bringing prices roughly 45 percent higher since the beginning of the year," he said.
The lifting of oil prices, which have been hovering at around US$60 per barrel this year, coincides with a slide in the euro, making imported oil even more costly as it is billed in dollars.
The European Commission said that oil prices of around US$60 a barrel would shave 0.2 to 0.3 percentage points off the economic growth of the euro-zone, where about 70 percent of oil is imported.
Domestic demand as another growth booster was also weak. Private consumption, for example, experienced only a slight growth rate of 0.1 percent in the second quarter.
"Compared to the second half of the previous year, domestic demand was weaker in both the EU and the euro area in the first half of 2005," Almunia said, adding private consumption growth was roughly "half that of previous recoveries."
Investment spending was even more disappointing, with the first quarter witnessing a 0.2-percent drop in fixed investment.
THE WORST DECLARED OVER
Following the poor readings in the first half of the year, a number of indicators began to send out positive signals for a recovery.
Brighter business confidence in the second half of 2005 ended the "soft patch" the EU has struggled through, the European Commission declared.
The Commission said stronger domestic demand, in particular private investment, was fueling the recovery. Total investment is now expected to increase to above 3 percent in 2006 and 2007.
Meanwhile, global growth made a strong comeback in combination with the steady depreciation of the euro to promote the euro-zone export, which saw a dramatic 1.8-percent rise in the second quarter.
This improvement brought the euro bloc to a year-on-year growth of 1.6 percent in the third quarter, up from 1.2 percent recorded in the first and second quarter.
Despite fast rising oil prices, key economic indicators, including economic sentiment, retail sales and industrial production surveys "have been quite encouraging," Almunia said.
"And we are going to end the year 2005 with a rate of growth of about 2 percent which provides a good outlook for 2006," the Commissioner said in reference to EU improvements.
With the backing of other favorable factors such as macroeconomic policies, benign financial conditions and wider profit margins, the European Commission also predicted:
Europe's stubbornly high unemployment is set to fall, with 4.5 million jobs to be created, bringing the jobless rate in the euro-zone down by nearly a percentage point to 8.1 percent in 2007, from the published 8.9 percent in 2004.
Inflation, which has been a major concern this year for policymakers amid soaring oil prices, will cool slightly as the average rate slips from 2.3 percent this year to 2.2 percent in 2006.
Earlier this month, the European Central Bank (ECB) raised interest rates by a quarter of a percentage point to 2.25 percent. The bank said the rise, the first of its kind for five years, is aimed at controlling inflation.
Private consumption and total fixed investment, which already saw a 0.5-percent rebound in the second quarter, is expected to grow by 1.6 percent and 3.5 percent respectively in the euro area next year.
The projections, however, are not taken for granted by all. Some analysts do not favor a lift of the interest rates, arguing that their current relative low will give more incentives to investment and private consumption.
Others have warned of external risks to Europe's economic outlook, citing global imbalances, an adjustment of US consumer behavior and possible further hikes in oil prices.
They fear that high oil prices, widely predicted by international organizations, are likely to slash corporate profits, weaken consumer confidence and eventually destabilize the fragile recovery in the euro-zone nations.