Euro-area GDP grew by 0.9% in the fourth quarter, boosted by strong domestic demand and vibrant export growth. Household consumption remained firm, while construction investment might have benefited from favourable weather conditions. Employment increased by 0.3% in the fourth quarter and by 1.4% in 2006 as a whole, the highest annual rate since 2001. Unemployment fell in January 2007 to 7.4%, its lowest level since 1993. For the year as a whole, GDP grew by 2.6%, up from 1.4% in 2005. Growth is expected to slow temporarily in the first quarter of 2007 due to the impact of the VAT rise in Germany, but prospects remain favourable. Business confidence and consumer confidence stand at high levels and according to the recent Commission's interim forecasts, the economy should continue to grow in 2007 at a robust rate (2.4%).
In its first focus section the report looks first at the contribution of labour cost developments to price stability and competitiveness adjustment in the euro area. All indicators show that wage moderation prevailed in 2006. Looking ahead, short-term upside risks exist, although product and labour market reforms and globalisation pressures should contribute to contain excessive wage claims. Nevertheless, the aggregate euro-area picture conceals large differences at the Member State level. In particular, developments in unit labour costs varied significantly across countries, contributing further to the steady widening of differences in competitiveness and in current account positions observed in the past few years. Rebalancing competitive positions among euro-area countries implies that countries which need to regain competitiveness will have to keep unit labour cost growth below average for some time.
The second focus section of the report looks at the decline in the volatility of output growth in the euro area since the 1970s. The rate of decrease has been uneven both across countries and GDP components. A strong decline in the volatility of inventories during the 1980s played a central role in the process, probably reflecting improved inventory management. Investment has also been an important contributor. The progressive shift of the production structure from goods to services has helped to reduce output volatility, but only to a limited degree. Economic policies have probably played a significant role, through improved budgetary policies and a stability-oriented monetary policy. Finally, a reduction of the size of economic shocks faced by the euro area may have contributed, but the importance of this last effect is more difficult to measure.
