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Europe's expansion probably accelerated; ECB may raise rates

Europe's expansion probably accelerated in the Q4, capping the best year for the economy since 2000 as the region's central bank prepares to raise interest rates.

The GDP of the nations that share the euro probably grew 0.6% in the Q4 from the third, when the economy expanded 0.5%, according to the median estimate of 39 analysts in a Bloomberg News survey. Eurostat, the European Union's statistics office, is due to publish the data at 11 a.m. tomorrow in Luxembourg, along with a first estimate of 2006 growth.
Booming exports led companies to increase spending and hiring, propelling the economy to 2.6% growth for the year, according to an EU forecast. Faster Q4 expansion would suggest that figure may be revised higher. „We're ending the year on a fairly strong note,” said Silvia Pepino, an economist at JPMorgan Chase & Co. in London, who estimates 2.7% expansion in 2006. „The economy will probably lose a bit of momentum this year, but it will still be firm.
The expansion will continue.” The European Central Bank signaled February 8 it's ready to raise its benchmark rate in March for the seventh time since December 2005 to keep inflation in check. Investors expect an increase in the rate to 3.75% from 3.5%, futures trading shows. The US Federal Reserve, in contrast, has kept its benchmark rate at 5.25% since August, while the Bank of Japan's main rate has stood at 0.25% since July.

The euro-region growth figures will be preceded by reports from member countries tomorrow. France's economy probably expanded 0.5% in the Q4 from the third, when it stagnated, another survey of economists shows. Growth may also have accelerated in Italy and Spain. The German economy, Europe's largest, probably maintained its momentum in the Q4, growing 0.6% from the third, a separate survey shows.
That report is due from the Federal Statistics Office in Wiesbaden at 8 a.m. tomorrow. German investor confidence may have risen for a third month in February, another survey shows. The ZEW Center for European Economic Research in Mannheim may say its index of investor and analyst expectations rose to 5 from minus 3.6 in January, according to the median estimate of 37 economists. That report is also due at 11 a.m. tomorrow.

„Overall, there is a bit more momentum building in the euro-area economy,” said Dominic White, an economist at ABN Amro in London. „If that starts to spill over and you get a pickup in wages, then that's going to be pretty important for the ECB.” The Frankfurt-based central bank is concerned that the pace of economic growth will enable companies to raise prices and unions to push through demands for higher wages.
Unemployment in the euro region declined to 7.5% in December, the lowest since records began in 1993, and confidence in the economy remained close to a six-year high last month. Economic growth may moderate this year after Germany and Italy raised taxes and as global demand for European exports started to cool. The ECB in December forecast growth will slow to about 2.2% this year from 2.7% last year. Its next set of economic projections is due in March. (Bloomberg)