The economy of the dozen euro nations grew the most in six years in the Q2 as exports spurred spending by companies and consumers, making it likely the European Central Bank will keep raising interest rates. The $10 trillion economy expanded 0.9% from the Q1, when it grew 0.6%, Eurostat, the European Union's statistics office in Luxembourg, said yesterday. Growth will probably reach about 0.7% in the next two quarters before slowing to 0.5% at the start of 2007, said the European Commission. The Q2 is the first time since early 2001 that Europe's economy outpaced the US with the euro region's gross domestic product poised to expand the most since 2000, the ECB raised rates four times since early December to curb inflation and is likely to do so again before the end of the year, economists and investors say. The “data make it even more likely than before that the ECB will go beyond the widely anticipated quarter point hike in October and raise rates to 3.5% by December,” said Holger Schmieding, co-head of European economics at Bank of America in London. From a year earlier, the economy expanded 2.4%.
The world's two largest economies, the US and Japan, slowed in the Q2. The US economy, destination of about a fifth of Europe's exports, expanded 0.6% last quarter, less than half the pace of the previous three months, and Japan's economic expansion slowed to 0.2% from 0.7%. Europe still compares poorly with the US in terms of economic growth. In the past five years the rate of euro-region expansion has averaged 1.4% compared with 2.6% in the US, according to figures by the International Monetary Fund. Near-record oil prices, the euro's 7% appreciation against the dollar this year and a cooling global economy may drag on Europe's expansion in coming months.
Germany's plan to increase a sales tax next year to 19% from 16% may restrain consumer spending in the region's largest economy. Crude oil increased to a record $78.40 a barrel on July 14 and traded at $72.85 yesterday, up 20% this year. The euro's increase erodes the competitiveness of European exports. That may present ECB President Jean-Claude Trichet with a dilemma: Whether to keep tightening credit to restrain accelerating prices or pause and protect the region's expansion. “Indicators suggest that growth peaked in the Q2,” said Anton Boerner, president of the BGA lobby group which represents 135,000 wholesale and export companies employing 1.35 million people in Germany. French industrial production stagnated in June, the Paris- based national statistics office Insee said Aug. 10.
European retail sales grew at the slowest pace in four months in July as borrowing costs and fuel bills rose. Expectations turned negative for the first time this year. Higher interest rates and oil prices “will have a dampening effect” next year, said David Mackie, chief European economist at JPMorgan Chase & Co. in London. “My inclination is that we'll still end up with numbers that are O.K., softer than this year, but at or above trend for the region.” Europeans' confidence in the economy last month rose to the highest in more than five years.
Manufacturing in the euro region expanded for a 13th month in July and the unemployment rate fell to 7.8% in June, the lowest since August 2001. MAN AG, Europe's third-largest truckmaker, is investing € 50 million in Europe to add capacity at the turbomachines unit, which boosted Q2 orders by 80%. The company plans to hire 300 more people at the division this year in Germany. Germany grew a faster than expected 0.9% in the Q2, when the World Cup soccer tournament may have boosted consumer spending. ThyssenKrupp AG, Germany's largest steelmaker, on Aug. 11 said fiscal Q3 profit jumped 84% and raised its full-year sales forecast. “The economic environment remains largely favorable in the second half of 2006,” ThyssenKrupp CEO Ekkehard Schulz said. Services, the biggest part of Europe's economy, are also growing. Diemen, Netherlands-based Randstad Holding NV, the world's fourth-largest temporary employment agency, said last month Q2 profit rose 33%, boosted by German demand.The ECB on Aug. 3 raised the benchmark refinancing rate to 3%, the fourth such step in eight months, and said further increases may be “warranted.” Inflation rates “are likely to remain above 2%” in the H2 of 2006 and in 2007, the Frankfurt-based bank said in its monthly report on Aug. 10. The ECB is concerned inflation will accelerate as economic growth picks up and workers demand higher wages to compensate for surging energy costs. Higher oil prices and faster growth pushed inflation to 2.5% in July, keeping it above the ECB's limit of just below 2% for an 18th month. “We've decided to raise our 2006 forecast for the euro area to 2.5%,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “The ECB will have to revise up its 2.1% forecast, and that paves the way for higher interest rates.” (Bloomberg)