Euro zone posts fastest growth in six years

Euro-zone growth accelerated to the fastest rate for six years in the three months to June, galloping past the US and highlighting clear improvements in the 12-country region's economic performance.

Gross domestic product - the value of goods and services produced in the euro zone - increased by 0.9 per cent in the second quarter, powered by surprisingly robust performances in Germany and France, according to Eurostat, the EU's statistical unit. In the same period, US growth had slowed to 0.6 per cent. The UK saw 0.8 per cent.

Economic prospects for Germany, which also had 0.9 per cent growth in the second quarter, were "exceptionally positive", said Michael Glos, the country's economics minister.

After half a decade of weak growth, euro-zone GDP data for the first half of 2006 shows a significantly stronger phase - which is likely to encourage the European Central Bank to continue raising interest rates.

The data suggested an increasingly self-sustaining euro-zone recovery might help to compensate for slower growth elsewhere in the world. The last time euro-zone quarterly growth exceeded that of the US was in the third quarter of 2001.

The European Commission yesterday revised upwards its growth forecast for the current quarter, which ends next month, to between 0.5 per cent and 0.9 per cent, from between 0.3 per cent and 0.7 per cent previously.

But economists pointed out that the region could be hit in coming quarters by a slowing US economy, higher euro-zone interest rates, the delayed negative effects of a stronger euro on exports and a significant fiscal tightening in Germany next year.

"Have we broken out of the phase of sluggish growth? Yes, unambiguously. Will it last for ever? No," said Ken Wattret, economist at BNP Paribas. The pick-up in euro-zone growth reflected a cyclical recovery, as already witnessed in the US and UK, and possibly a boost from last month's football World Cup.

But Holger Schmieding, economist at the Bank of America, suggested falls in unemployment and the breakdown of traditional working arrangements pointed to lasting improvements in euro-zone labour markets.

That could quicken the pace at which the upturn fed through into consumer spending, he said.

Yesterday's figures put the euro zone on course to grow by as much as 2.5 per cent this year - also the fastest rate since 2000.

However, most economists expect a slowdown in 2007, largely as a result of a planned 3 percentage point increase in German value-added tax. The second quarter of this year "will probably be seen as the peak of expansion", said Julian Callow, economist at Barclays Capital.