Europe's economy probably grew fastest in two years
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, with the pace close to a six-year high. ThyssenKrupp AG, Germany's largest steelmaker, on Aug. 11 said fiscal Q3 profit jumped 84% and raised its full-year sales forecast. Orders at Alstom SA, the world's third-biggest maker of power stations, rose to a five-year high in the three months through June, the French company said last month. „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 unemployment rate in the euro region fell to 7.8% in June, the lowest since August 2001. The ECB is concerned inflation will accelerate as economic growth picks up and workers demand higher wages to compensate for surging energy costs. Near-record 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. Crude oil was trading at $74.30 a barrel in New York at the end of last week, compared with a record $78.40 reached July 14. 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 second half of 2006 and in 2007, the Frankfurt-based bank said in its monthly report on Aug. 10.
Holger Schmieding, chief economist at Bank of America in London, is among economists who expect the ECB to increase its benchmark rate to 3.5% by the end of the year. Investors anticipate the ECB will raise the rate to at least 3.25% by December to tame inflation, futures trading shows. „The economic news can hardly get any better,” Schmieding said in a note to investors on Aug. 11. „Euro-zone growth will likely moderate slightly from its recent rapid pace.” The increase in fuel costs and the euro's 9% increase against the dollar this year may curb demand for European exports. Germany's plan to increase a sales tax next year may restrain consumer spending.
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. The professional forecasters at the ECB reduced their 2007 growth estimate to 1.8% from 1.9%, an Aug. 10 report showed. That compares with growth of 2.2% this year, according to the survey. 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. (Bloomberg)
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