With Renault set to announce a wide-ranging restructuring plan tomorrow, home-market competitor PSA Peugeot Citroen today issued its own bleak forecast for the western European market.

Despite an agressive new product launch program, PSA Peugeot Citroen still sees slender profit margins in 2006, driven largely by flat market demand, the cost of complying with new European emissions standards and rising costs of raw materials.

The company forecasts operating margins in the first half of 2006 to be around 2.8 percent, rising to perhaps 4 percent in the second half of the year.

With a flat market, the success or failure of European carmakers this year will depend on their ability to cut costs, and the competitiveness of their new models. With a raft of new models and a drive to increase unit sales from every company,  2006 should be a great year for European car buyers and a tough one for auto industry execs.

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