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German economic growth unexpectedly accelerates

German economic growth unexpectedly accelerated in the Q4 as exports boomed and consumers increased spending ahead of a sales-tax increase.

Europe's largest economy grew 0.9% in the Q4 from the third, when it expanded 0.8%, the Federal Statistics Office in Wiesbaden said today. GDP, the value of all goods and services, rose 2.7% in 2006 instead of the 2.5% the office estimated last month. German companies have stepped up spending and production to meet increased export orders, making the economy one of the best performers among the 13 nations sharing the euro. With companies adding workers and the US economy showing signs of rebounding, any slowdown following German Chancellor Angela Merkel's sales-tax increase this year may be limited. „It's a strong quarter of growth and shows that the euro-area recovery is broadening out,” said Edward Teather, an economist at UBS AG in London. „People may be revising their growth estimates up for the first quarter after today's figures. It's good momentum we've got here.” While „extremely dynamic trade accounted for most of the pickup” in the Q4, increasing investment and consumer spending also contributed, the statistics office said. The euro rose to $1.2998 at 8:59 a.m. in Frankfurt from $1.2971 before the report. European government bonds fell, sending the yield on the benchmark two-year German note up 1 basis point to 3.96%.
Economists expected an expansion of 0.6% in the Q4, according to the median of 40 forecasts in a Bloomberg News survey. The statistics office had previously reported Q3 GDP of 0.6%. The revisions were based on „better results” in the manufacturing and building industries as well as higher investment in construction, the office said. In the euro-region, growth probably accelerated to 0.6% in the Q4 from 0.5% in the previous three months, a separate Bloomberg survey showed before the release of the German data. Eurostat, the European Union's statistics office, will publish figures at 11 a.m. in Luxembourg. 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, Insee, the Paris-based national statistics office said today. Economists had expected growth of 0.5%.

„The outlook is more positive,” said Kornelius Purps, a fixed-income strategist at Unicredit in Munich. „Germany is the euro-region's growth engine and we're getting the impression that the transition into 2007 was maybe smoother than expected ahead of the value-added tax increase this year.” German households probably stepped up spending in the Q4 to avoid a VAT increase to 19% from 16% on January 1, said Stefan Bielmeier an economist at Deutsche Bank AG. „Consumer spending probably significantly added to expansion in the fourth quarter,” said Bielmeier. Euro-region unemployment 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. The statistics office will publish a detailed breakdown of Q4 GDP on February With higher taxes eroding households' purchasing power, companies may have to rely on demand from outside their domestic market to bolster earnings. The US economy, the world's largest, expanded faster than economists forecast in the Q4. China's economy grew 10.7% in 2006, the fastest pace in 11 years.

ThyssenKrupp AG, Germany's largest steelmaker based in Dusseldorf, said today that full-year pretax profit was „clearly” more than it previously expected after Q1 earnings more than tripled. MAN AG, Europe's third-largest truck maker, said February 6 that 2007 economic prospects are „bright.” Germany's benchmark DAX Index, which measures the performance of the 30 largest listed companies including Siemens AG and SAP AG, has gained about 4% this year, making it one of the best performers among major European stock markets. German investor confidence probably rose for a third straight month in February, a Bloomberg News survey shows. The ZEW Center for European Economic Research in Mannheim will report figures at 11 a.m. today.
The German government on January 31 raised its growth forecast for this year on expectations that exports will keep increasing. The economy may expand 1.7% instead of 1.4% projected in October, it said. The economy of the euro region may expand about 2.2% this year, the European Central Bank forecasts. That's down from around 2.7% in 2006. The French government estimates growth was between 2% and 2.5% in 2006. „We're relatively optimistic,” German Bundesbank President Axel Weber said February 3. „I expect the economy to strengthen considerably further over the next two years.” Stronger growth makes it easier for companies to cope with higher borrowing costs.

European Central Bank President Jean-Claude Trichet on February 8 stepped up his inflation-fighting rhetoric, calling for „strong vigilance,” a term he used in the past to signal an imminent rate increase. The bank raised the benchmark lending rate six times in the year through December 2006, to 3.5%. Investors have already raised bets on future interest rate increases, futures trading shows. The implied rate on the September futures contract was at 4.16% today, up from 4.09% at the beginning of the year. 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)