Rate rises on horizon as eurozone growth beats US

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The eurozone, powered by a quickening recovery in Germany and France, yesterday recorded its fastest growth in six years, overtaking the US and raising the prospect of at least two more rate rises from the European Central Bank.

Official figures released by Eurostat showed that gross domestic product in the 12 countries using the euro rose 0.9 per cent quarter-on-quarter from April to June this year. Compared with the same period last year, the eurozone expanded by 2.4 per cent.

The statistics suggest that Germany's export-led recovery has finally begun to feed through into rising domestic demand as investment picked up and the World Cup boosted spending. Analysts were also impressed by growth of 1.2 per cent in France, where the home economy was strong and there were signs of exports increasing.

By contrast, US economic growth has slowed in the second quarter to 0.6 per cent. The UK, at 0.8 per cent, performed slightly less well than the eurozone average.

Dresdner Bank predicted the ECB will now raise interest rates, in two stages, to 3.5 per cent, while Deutsche Bank forecast a third rise to 3.75 per cent early next year. The outlook for 2007 remains less positive but economists expect stronger European growth this year than at any time since the dot.com boom.

Mark Wall, a senior economist for Deutsche Bank in London, said: "The economy is in excellent shape. 0.9 per cent growth in the eurozone is better than we anticipated. In Germany there is the possibility that the World Cup gave the economy a bit of a boost and that the poor winter weather meant a catch-up factor in construction in the second quarter.

"But there was also an upward revision to historic data, with a stronger performance in the last quarter of last year and the first quarter of 2006."

With the German and French economies together dominating the eurozone, evidence of a sustained recovery in both nations has been long awaited by politicians and bankers.

Claudia Broyer, a eurozone analyst for Dresdner Bank in Frankfurt, said the statistics suggest the German economy has turned the corner. She argued: "Growth in Germany was led by exports but now this export-induced stimulus has fed over into investment and now private consumption. German investment was strong and there was good news from the labour market. The recovery has got broader. That is what you would expect in the cycle. Now we can see that it has happened."

But Ms Broyer added that she was "surprised by the growth outside Germany, especially in France" and that the French economy was unlikely to sustain such a performance.

Analysts are also cautious about the overall prospects for the eurozone in 2007. Most believe that slowing US growth will have an impact on eurozone exports. By next year, European economies are also expected to feel the effect of higher eurozone interest rates and fiscal tightening, especially in Germany where VAT will increase.