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‘Strong momentum’ in Euro region may continue

The $10 trillion economy will expand 2.5% this year, the fastest pace since 2000 and above the 2.1% projected in May, the commission, the European Union's economic watchdog, said yesterday. While saying the risks to the economy are on the rise, it said growth in 2007 will probably be higher than the 1.8% the commission predicted in May. “This acceleration of growth reflects the greater ability of the European economy to rely on domestic demand,” EU Monetary Affairs Commissioner Joaquin Almunia told reporters in Brussels. The European economy outpaced the US in the Q2, with the euro area's 0.9% growth beating the world's largest economy for the first time since 2001. “The current strong momentum may, if the favorable conditions continue, be maintained for some time,” the commission said in a 10-page report.  

“Many indicators are still well above their long-term averages, suggesting a healthy pace of economic activity also in the second half of the year,” the commission said, reiterating its expectation for growth of 0.7% in both the Q3 and Q4. “The economic recovery now appears more broad-based,” it said. There are signs growth in Europe has peaked, with energy costs soaring after oil prices rose 12% this year and exports threatened by a fading US economy and the euro's 8% gain against the dollar this year. A planned tax increase in Germany and increased euro-area interest rates also may slow the expansion. The European Central Bank raised its key rate four times since early December as the faster-then-expected growth and near-record oil prices fan concerns that inflation in the euro region will remain above the ECB's 2% ceiling. ECB President Jean-Claude Trichet last week signaled the central bank will increase rates again in October. “There are risks,” Almunia said. “We do not think the danger is over.”  

Consumer prices will rise 2.3% this year, the commission said, revising up its forecast from 2.2% in May. While it said that the effects of oil prices on other costs were “broadly absent,” the commission warned that declining unemployment may generate higher wage demands. “The balance of risks become tilted to the downside in 2007,” the commission said. Business and household confidence in the euro area declined in August for the first time since November and retail sales in Germany, the region's largest economy, dropped 1.5% in July from June. European retail-sales growth slowed for a third month in August, the Bloomberg purchasing managers index showed yesterday.  

The commission's outlook is in line with that of the ECB, which last week increased its projections for euro-area growth and inflation. The Frankfurt-based central bank expects the economy to expand about 2.5% in 2006 and 2.1% in 2007, with consumer prices increasing about 2.4% this year and next. Futures trading shows investors expect the ECB to raise its key rate to 3.5% by the end of the year from 3% now. Almunia said he wanted a better “dialogue” between governments and the central bank. “European citizens deserve better coordination,” he said. (Bloomberg)