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Europe's growth accelerates more than expected

Europe's growth accelerated more than expected in the Q4 and an increase in German investor confidence suggested the momentum will be maintained in 2007.

The GDP of the euro area grew 0.9% in the Q4 from the third, when it expanded 0.5%, the European Union's statistics office in Luxembourg said today. That exceeded the median estimate of 39 analysts in a Bloomberg News survey. An index of investors expectations in Germany rose for a third month to 2.9 in February from minus 3.6 in January, the ZEW Center said in a separate report. Europe's economy grew the fastest in six years in 2006, with Germany one of the drivers of the expansion after 11 years of below-average expansion.
With companies adding workers and the US economy showing signs of rebounding, that may limit a slowdown following a sales-tax increase in Germany and further increases in interest rates by the European Central Bank. „The euro-zone economy ended 2006 with a bang,” said Howard Archer, chief European economist at Global Insight in London. The „latest survey evidence and data indicate overall that the economy has made a healthy start to 2007.”
Growth in the euro area will probably ease to 0.6% in this quarter before accelerating to 0.7% in the next three-month period, the European Commission said today. For the Q3, growth is expected to be 0.6%, it said. Expansion in the German economy, Europe's largest, unexpectedly accelerated to 0.9% in the Q4 as exports boomed and consumers increased spending ahead of a sales-tax increase in January, the country's Federal Statistics Office said today.

GDP rose 2.7% in 2006 instead of the 2.5% the office estimated last month. The French economy, Europe's third-largest, rebounded in the Q4, expanding as much as 0.7% from the previous three-month period, when it stagnated. Economists had expected growth of 0.5%. European government bonds fell after the German and French reports. The yield on the benchmark 10-year German bund rose 2 basis points to 4.12% by 10:30 a.m. in Brussels. The yield on the benchmark two-year note also rose 2 basis points to 3.97%.
The euro rose 0.2% to $1.2995. „The trend is of a clear recovery, of a sustained and broadly based recovery, in the euro area and in Europe,” European Union Monetary Affairs Commissioner Joaquin Almunia said in an interview yesterday. The impact of Germany's increase in sales tax „has been lower than expected.”

The ECB signaled February 8 it is 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 Frankfurt-based ECB is concerned that the pace of economic growth will enable companies to raise prices and unions to push through demands for higher wages.
Unions in Germany are demanding pay increases of up to 6.5%, more than three times the ECB's estimated inflation rate for 2007. Unemployment in the euro region declined to 7.5% in December, the lowest since that data were first collated in 1993, and confidence in the economy remained close to a six-year high last month. Still, the pace of growth may moderate this year as higher borrowing costs and the tax increases curb domestic consumption and export demand weakens. The European Commission in November forecast growth will slow to about 2.1% this year. Its next set of economic projections is due on Friday. (Bloomberg)