Economic Outlook

With unemployment at a record low, inflation tame, and confidence high, the European economy started 2007 on a firm footing, helping the continent narrow its long-standing growth gap with the United States.

While first official estimates are not due before mid-February, the European Commission has said eurozone growth last year was at least 2.6 percent and would likely be nearly as high this year.

The upturn is helping Europe put in a more respectable performance after lagging the fleet-footed US economy for years.

But US data published Wednesday showed that the United States continues to outpace Europe by a comfortable margin.

Internet boom helped Europe

US economic growth reached 3.4 percent last year, the US government reported on Wednesday, while expansion of 3.5 percent in the final quarter beat Wall Street analysts' expectations.

Data on euro zone countries going back to 1993 show that the bloc outperformed the United States only in 2000 and 2001, when Europe benefited from the Internet boom.

Over the long term, the United States is likely to keep its growth lead, especially as Europe's aging population and limited immigration keeps the number of active workers down.

"The convergence between the United States and Europe started last year, but US growth will remain stronger thanks to more dynamic demographics and a bigger working population," Morgan Stanley economist Eric Chaney said.

But in the short term, Europe's growth prospects are looking up.

Surviving the VAT hike

After a particularly strong showing in 2006, the 13 countries sharing the euro currency were expected to see growth slow this year, in part due to an increase in German value added tax and a US slowdown.

But a barrage of data published Wednesday showed that the VAT hike in Germany, Europe's biggest economy, has had only a negligible effect while US growth is proving stronger than expected.

As a result, many economists now expect any slowdown in European growth to be relatively small.