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European growth outpaces US in second quarter

Surprised by the magnitude of the recovery, economists said the rest of the year might not prove quite so good, though Germany was showing signs of a long-awaited revival in domestic demand, and that ECB interest rates were set to rise further.

Growth hit 0.9 percent in both the 12-nation euro currency zone and the 25-country European Union in the April-June period versus the previous quarter, the fastest since the second quarter of 2000 just before the boom in high-tech stocks went belly-up.

“The preliminary estimate of euro-zone GDP should put an end to any remaining doubts over the strength of the economic recovery in the region,” Jonathan Loynes of Capital Economics said.

The announcement of the pan-European growth estimates followed news from Germany that GDP there rose 0.9 percent in the second quarter too, a level last reached in the first quarter of 2001 and unbeaten since the second quarter of 2000.

France on Friday confirmed it had done even better with a surge of 1.1-1.2 percent, more than double its first-quarter pace and the fastest since the last quarter of 2000.

For the first time in a long while the national and pan-European figures topped those of the United States, where growth was around 0.6 percent in the second-quarter, and also Japan and Britain where GDP rose 0.2 percent and 0.8 percent respectively on a comparable quarter-on-quarter basis.

“Europe is in the lead,” said Holger Schmieding, an economist at Bank of America.

He and many others predicted that the European Central Bank would raise interest rates to 3.5 percent by end-2006, 1.5 percentage points above last December’s level when the bank started its round of rate hikes.

Niels-Henrik Sorensen of Danske Bank said the soccer World Cup in Germany in June and July had probably boosted spending by consumers, but not dramatically.

”Still, the bottom-line is that the domestic economy is getting increasingly strong, as also evidenced by the strengthening of the labour market,” he said.

Spain, the fourth-largest euro zone economy after Germany, France and Italy, announced second-quarter growth of 0.9 percent.

Last Friday, Italy reported 0.5 percent second quarter growth, weaker than the first quarter, but slightly better than economists had expected.

“The big question now, of course, is how long can the euro zone recovery continue?” said Loynes at Capital Economics.

The European Commission says it may increase its 2006 euro zone growth forecast, currently at 2.1 percent versus 1.3 percent in 2005.

On Monday, the Commission raised its estimate for third-quarter growth to 0.5-0.9 percent quarter-on-quarter from 0.3-0.7 percent projected on July 12. It cut its fourth-quarter forecast to 0.4-0.9 percent from 0.5-1.0 percent.