BRUSSELS, Oct 26 (AFP) - The European Commission on Tuesday cut its growth forecast for 2005 and warned that nearly half of the 12-nation eurozone is set to breach their own budget rules, as surging oil prices hit a fragile recovery.
But the EU executive, in its regular autumn forecasts, said growth this year is stronger than expected and predicted that the economy should pick up again in 2006.
"Economic activity in the euro area and the EU gathered speed in 2004, supported by the continued buoyancy of global growth and trade," said the EU executive.
It forecast growth for this year at 2.1 percent -- compared to 1.7 percent in its spring forecasts six months ago -- and 2.5 percent in the full 25-member European Union "thereby exceeding expectations."
"This should be followed by a slight deceleration to 2.0 percent for the euro area and 2.3 percent for the EU in 2005 as the sharp rise in oil prices takes its toll."
"A subsequent rebound is expected in 2006 to 2.2 percent and 2.4 percent respectively," it added.
Meanwhile it warned that five members of the eurozone -- France, Germany, Italy, Greece and Portugal -- are set to breach the budget rules underpinning the euro next year.
Unless they take swift corrective action, the countries are heading to a breach of the Stability and Growth Pact, which sets deficit limits at three percent of gross domestic product (GDP).
"Deficits around or in excess of the three percent of GDP threshold are expected in Germany, Greece, France, Italy and Portugal, unless additional consolidation measures are adopted," said the EU executive.
The eurozone pact was effectively suspended last year when EU heavyweights France and Germany persuaded the EU to hold off from imposing disciplinary measures despite their repeated violation of the rules.
Europe's recovery is still being fueled by the global growth in demand, and in addition to this key factors include low inflation, widening profit margins and progress in structural reforms, it said.
"The consolidation of the recovery over the forecast horizon is underpinned by an acceleration of investment expenditure and a more gradual pick-up in private consumption," it added.
It added that unemployment is set to remain stable this year and in 2005, at about 8.9 percent in the eurozone and 9.1 percent in the EU, "before edging downwards in 2006."
About 600,000 jobs due to be created this year in the eurozone and 800,000 in the EU. "For the euro area this figure should almost double in 2005," it added.
Inflation has remained "rather sticky" this year due notably to oil price hikes, and is projected to be 2.1 percent for the whole of 2004.
"Headline inflation is expected to fall to 1.9 percent in 2005," it added.