Polish bus drivers and other migrants from nations that joined the European Union last year are helping the Midlands rise from the economic doldrums, according to a report published today.

This unexpected consequence of the UK being one of only three EU countries to immediately sign up to freedom of movement of labour in 2004 is helping to drive economic growth, according to the study by The Ernst & Young Item Club.

It expects GDP growth to pick up to 2.6 per cent in 2007 and 3 per cent in 2008 even if interest rates stay at 4.5 per cent.

But while the region's service sector continues to flourish, manufacturing is still struggling, according Ronnie Bowker, senior partner in Ernst & Young's Birmingham office, said.

Mr Bowker said manufacturing still underpinned much of the local economy and would find it difficult to recover from the loss of 10,000 skilled jobs in the wake of the Longbridge collapse and the impending closure of Ryton.

He said: "The region's climb from its economic doldrums of last year continues, and if the West Midlands economy manages to mirror the Item Club's GDP predictions of 2.6 per cent in 2007 then it will be in good shape.

"Faster growth in Europe and a stronger global economy is helping to readdress the balance and drive economic growth, with both service and manufacturing industries showing an upturn in export and domestic sales.

"However, against this positive backdrop, the West Midlands' automotive industry has suffered another blow following the announcement last week of the Peugeot Ryton plant closure, with the loss of 2,300 jobs.

"This rubs salt in the wounds for the region's automotive sector which has barely recovered from the collapse of MG Rover."

Mr Bowker said the service sector was booming, confirm-ing research that 50,000 jobs will be created in the next ten years in the Midlands.

"This is certainly positive news, but with the loss of automotive manufacturing at Longbridge and Ryton the region has lost nearly 10,000 highly skilled jobs in just over 12 months.

"It will be difficult to bounce back completely from this.

"I see a clouded economic picture in the Midlands.

"Services industries are certainly generating wealth and jobs.

"But we cannot hide from the fact that manufacturing is the mainstay of the West Midlands economy, and if the region is to prosper then so must manufacturing. With rising energy costs and oil teetering on the brink of a price spike record, more needs to be done to support manufacturers. "

The influx of overseas workers - there are estimated to be at least 400 Polish bus drivers in the West Midlands for example - boosted the UK economy by keeping interest rates down.

The Item Club, which uses the Treasury's model of the economy for its forecasts, said the cost of borrowing would be five per cent instead of the current mark of 4.5 per cent without the arrival of people willing to work.

According to the ITEM Club, migrants from countries such as Poland and Slovenia have plugged gaps in industries ranging from hospitality to catering.

Almost 300,000 immigrants have taken jobs in the UK in the past three years and have not isolated themselves to London, it found.

Professor Peter Spencer, chief economic advisor to the ITEM Club, said: "We are on the crest of a new immigration wave.

"The steady flow from the most recent accession countries to the UK has proved remarkably positive for the economy, keeping interest rates a half a per cent lower than they would otherwise have been."