Strong domestic demand sees eurozone growth accelerate

BRUSSELS - Domestic demand drove quarterly eurozone economic growth at its fastest pace in six years in the second quarter, marking a likely peak in the economic upswing.

EU statistics office Eurostat at the week-end confirmed its estimate that GDP in the 12 euro countries rose 0.9 per cent quarter-on-quarter in April to June for a higher than estimated 2.6 per cent year-on-year rise.

First-quarter growth was also stronger than previously reported, with the quarterly number revised up to 0.8 per cent from 0.6 per cent and the year-on-year rise at 2.1 per cent from the earlier reported 2 per cent.

"The quarterly results suggest that economic activity will have peaked this spring, and slower growth can be expected over the remainder of the year. Exports in particular seem likely to slow down," Commerzbank said in a research note.

The upward first-quarter revision supports the European Central Bank's higher 2006 growth forecast for the euro zone of 2.5 per cent rather than the earlier 2.1 per cent.

"It does support the need to reduce the degree of monetary accommodation in the eurozone," said Holger Schmieding, economist at the Bank of America.

Economists expect the central bank to raise rates for the fifth time since December by 25 basis points to 3.25 per cent on October 5 to stem inflationary pressures from fast credit growth and expensive energy.

Many see another rate rise in December, which would take the costs of borrowing to 3.5 per cent, since growth in the eurozone is likely to stay robust in the third and fourth quarters.

- REUTERS