European economic rally to prove itself in 2007

19th December 2006, Comments 0 comments

19 December 2006, Berlin (dpa) - The 12-member eurozone economy is ending the year on an upbeat note but with the real test of the upswing that has taken shape this year likely to emerge in the coming months.

19 December 2006

Berlin (dpa) - The 12-member eurozone economy is ending the year on an upbeat note but with the real test of the upswing that has taken shape this year likely to emerge in the coming months.

Powered by an upswing in its biggest economy Germany, the currency bloc's biggest economy, the eurozone is expected to book its fastest expansion rate in about six years in 2006 with the European Commission projecting that the region will wind up the year with a growth rate of 2.6 per cent.

Once the sick man of Europe, German growth is expected to top 2.5 per cent this year helping to end a protracted period of stagnation in the country and boost the nation's labour market, which up until recently had come to symbolise the economic woes recently facing the eurozone.

Underpinning this year's economic turnaround in the eurozone has been a strong performance by the region's corporate sector which has sharpened its international competitive edge often as a result of a rigorous restructuring that has helped to boost foreign orders.

This is in stark contrast governments across the region which has once again failed to rise to the occasion by helping to bolster growth with long-overdue major reforms.

But with signs that the giant US economy is slowing and analysts' worries that Germany's plans for a hefty hike its value-added tax in January and a tax rise in Italy could hit consumer spending in two of eurozone's largest economies, economists believe that growth in the currency bloc will slip back a gear next year.

Of particular concern to analysts is that an economic slide in the US combined with a further acceleration in the euro could undercut the eurozone's key export machine.

This could occur just as the German and Italian tax rises were introduced and the European Central Bank's combined 150 basis points increase in interest rates this year were biting into the bloc's economic activity.

Pointing to the potential trouble ahead for the eurozone, German retail sales posted a surprise fall in October, while consumer confidence in the currency bloc's second biggest economy, France unexpectedly sank in November.

More to the point, the flood of recent US data only seems to have added to the uncertainty about how hard a landing the world's biggest economy is likely to have and the impact of an American economic downturn will have on global growth and eurozone exports, a key pillar of the currency bloc's economy.

In the meantime, the US dollar has gone into retreat.

But despite the euro hovering around a 20th month high against the dollar, the ECB finished off the year by delivering another increase in the cost of money, raising its benchmark refinancing rate by 25 basis points to 3.50 per cent - its highest level since the last big pickup in the currency's bloc economy in 2001.

Also overhanging the eurozone as it enters the new year is the threat posed by renewed inflationary pressures. Indeed, after falling sharply following a record high of 78.40 dollars a barrel in July, oil prices have begun to pick up again in recent weeks.

Already evidence has emerged that the pace of the eurozone's expansion might have slipped during the second half of the year.

After a second-quarter growth of 1.0 per cent, the eurozone slowed to 0.5 per cent in the third quarter, with the commission projecting a 0.5 per cent expansion rate for the fourth quarter.

But as the year draws to a close a growing number of economists believe that the economic momentum the eurozone's has built up this year will help to propel it into the new and as a result minimise any fall out from the German VAT rise and the cooling down of the US economy.

"The upswing is not breaking up," said Michael Huether, the director of the Cologne-based Institute for the German Economy, waving off concerns about the impact of the VAT rise on German economic growth. "The economic motor remains in tact," he said.

Indeed, unemployment in the eurozone has dropped to its the lowest level for about 13 years, official figures showed with the region's the jobless rate coming in at 7.7 per cent in December after reaching a peak at about 9.0 per cent in mid-2004.

At the same time, a raft of economic sentiment surveys has helped to underscore the growing sense of optimism about the sustainability of the economic pickup.

While the European Commission's latest business and consumer confidence survey slipped marginally to 110.3 in November from a revised 110.4 in October, Germany's closely watched ifo business confidence survey climbed back up to a 15-year-high in November.

In addition, both eurozone business leaders and finance ministers have reacted relatively calmly to the euro's recent ascent which has raised the prospect of the common currency heading back towards the all-time high of 1.36 dollars it high at the end of 2004.

"There is no cause for hysteria", said Andreas Scheuerle economist from Germany's DekaBank. "There are enough buffers, which can cushion the problem. "


Subject: German news



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