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European confidence probably matched 6-year high in December

Confidence in the European economy probably rose in December to match a six-year high, suggesting growth in the region may withstand a German tax increase and rising interest rates, a survey of economists shows.

An index of sentiment among executives and consumers in the euro area may have increased to 110.4 from 110.3 in November, the median forecast of 15 economists in a Bloomberg News survey predicted. That would match October's level, which was the highest since February 2001. Unemployment probably declined to a record low of 7.6% in November, a separate survey showed. Europe's economy expanded at the fastest pace in six years in 2006, buoyed by exports and improving consumer demand.
While the expansion is expected to slow this year, rising employment and confidence may help to keep growth above 2% for a second year, according to forecasts from the European Central Bank and the European Commission. „We're going to see growth which is solid, but not quite as strong as in 2006,” said Silvia Pepino, an economist at JPMorgan Chase & Co. in London. „Consumption should continue to look pretty solid in the euro area.” The European Commission will publish the confidence report at 11 a.m. in Brussels. The unemployment figures will be released at the same time by Eurostat, the European Union's Luxembourg-based statistics office.

Confidence in the outlook is prompting companies to invest and hire more workers. Deutsche Lufthansa AG, Europe's second-biggest airline, plans to create 3,000 new jobs in Germany this year to meet an expansion in air travel, it said on January 2. Other German companies such as Continental AG, the world's fourth-biggest tiremaker, and Adidas AG, the No. 2 sporting-goods company, also plan to increase spending and hire new staff this year, according to responses they provided in a Bloomberg survey.
Unemployment in Germany, the euro region's largest economy, fell last month to a four-year low of 9.8%. There are some signs the pace of growth in Europe is easing. Expansion in service industries, the biggest part of the economy, unexpectedly slowed in December. Manufacturing and retail-sales growth also eased last month, according to private reports published this week. Euro-area exports may be curbed by the euro's 8% gain against the dollar in the last 12 months and weaker US growth. Domestic demand in Germany may cool in the first quarter after the government increased a sales tax this month.

The ECB forecasts that expansion in the euro area, now 13 nations after Slovenia adopted the common currency this week, may slow to 2.2% this year from 2.7% in 2006. While the central bank also predicts slower inflation, it has signaled it may continue to raise borrowing costs to counter price risks. M3 money supply, which the ECB uses as a gauge of future inflation, expanded 9.3% in November from a year earlier, the biggest increase since April 1990. „We will do whatever is necessary to ensure price stability,” ECB President Jean-Claude Trichet said on December 20.
„We have risks that are on the upside as regards inflation.” Euro-region inflation held at 1.9% in December, just below the ECB's 2% ceiling, a report yesterday showed. Futures trading shows investors expect the ECB will increase its key rate to 3.75% as soon as March. The yield on the three-month Euribor futures contract for March was at 3.92% today, up from 3.75% on December 4. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999. (Bloomberg)