Eurozone grows strongly

PARIS – The eurozone economy remained in high gear in September, even if growth may have peaked by midyear, according to surveys of business and consumer confidence published in Italy and Germany on Wednesday. Market research firm GfK said it found German consumers more willing to spend in September than at any time since the reunification of the country in 1990, mainly because value-added tax will jump in January. In Italy, business confidence rebounded in the same month to its strongest level since June’s record high, beating forecasts by economists, Italy’s ISAE think-tank said. That followed a report by the Ifo institute on Tuesday which said German business sentiment stayed healthier than expected in September, as optimism about current conditions in Europe’s largest economy rose to its highest in more than 15 years. France reported a marginal September dip in business morale on Monday because of concern over exports, but domestic demand was still strong, with a survey last Friday revealing that consumer spending hit its best in August since July 1999. All that arguably strengthens the view in financial markets that the European Central Bank will forge on with more interest rate increases as early as next week to head off inflation, even if oil prices are falling. In a Reuters poll released on Wednesday, 79 of 80 economists forecast eurozone rates would rise to 3.25 percent next Thursday, with 71 betting on another rise in December to 3.5 percent. Altogether 31 of them predicted rates at 3.75 percent or above by the end of June 2007, more than previously. The ECB said on Wednesday that eurozone money supply and loan growth accelerated unexpectedly in August, with borrowing by business rather than consumers driving a rise in private sector loan growth to an annual 11.3 percent from 11.1 percent in July. Economic growth in the eurozone outpaced the United States in the second quarter with an annualized rise of 3.6 percent in gross domestic product versus the preceding quarter. Most forecasters believe this pace will slow in the latter half of 2006 but not dramatically, and the prospect of a big VAT rise in January is encouraging Germans to spend now, boosting consumption in 2006, perhaps at the expense of 2007. GfK said its forward-looking consumer sentiment indicator for October, based on a survey of some 2,000 Germans, rose to 8.8, the highest since November 2001, from 8.6 in September. Willingness to buy in September – the GfK components lag the headline number by a month – stood at 62.3, rising 6.2 points to the highest level since German reunification. Chancellor Angela Merkel’s coalition plans to raise VAT three percentage points to 19 percent to ease pressure on Germany’s public finances and reduce non-wage labour costs. West LB economist Joerg Lueschow predicted consumption would rise noticeably in coming months. «But that’s only a once-off phenomenon,» he added. In Italy, ISAE’s seasonally adjusted business confidence index rose to 97.3 from an upwardly revised 94.9 in August. «Confidence is growing in all sectors with the most marked increase in consumer goods,» ISAE said in a statement. There are, however, some warning signs in recent data. While the German Ifo institute’s current conditions index jumped to its highest since April 1991, another one measuring corporate expectations dipped to its lowest level in 10 months. Outside the eurozone, the news was mixed. The Swiss KOF leading indicator of business sentiment fell in September for a second month in a row while Sweden published surveys showing still healthy consumer and business sentiment. UK economic growth was unexpectedly revised down to 0.7 percent for the second quarter from 0.8, the Office for National Statistics said, attributing this among other things to the fact that it overestimated the effect of the World Cup on betting.