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. Last Updated: 07/27/2016

Euro Zone Bests the U.S. With Record Growth

DUBLIN -- The economy of the euro nations grew the most in six years in the second quarter, making it likely that expansion this year will beat the European Central Bank's forecast and lead to further increases in interest rates.

The $10 trillion economy expanded 0.9 percent from the first quarter, when it grew 0.6 percent, Eurostat, the European Union's statistics office in Luxembourg, said Monday. Growth will probably reach about 0.7 percent in the next two quarters, before slowing to 0.5 percent at the start of 2007, the European Commission said.

The second quarter is the first time since early 2001 that Europe's economy outpaced that of the United States. Accelerating growth has prompted the ECB to increase interest rates four times since early December to curb inflation. While the economy is poised to expand at the fastest pace since 2000, a combination of rising borrowing costs, higher oil prices and a stronger euro threatens to slow growth later this year and into 2007.

"You will see some effect on growth in the second half of the further rise in oil prices," said Martin van Vliet, an economist at ING Bank in Amsterdam. "But this year will clearly be above trend," with the ECB likely to have to raise its 2.1 percent growth forecast for this year.

Experts had expected growth of 0.8 percent in the second quarter from the previous three months, according to the median of 38 economists surveyed by Bloomberg News. From a year earlier, the economy expanded 2.4 percent.

European stocks rose and bonds declined, with the Dow Jones STOXX 50 Index up 0.6 percent, to 3449.13 by late morning in Frankfurt, and the yield on the benchmark 10-year German bond gaining 2 basis points to 4 percent, the highest since July 18. The euro rose to $1.2739, from $1.2723 at the start of trading Monday.

Europeans' confidence in the economy last month rose to the highest point in more than five years. Manufacturing in the euro region expanded for a 13th straight month in July.

ThyssenKrupp, Germany's largest steelmaker, said Aug. 11 that fiscal third-quarter profit had jumped 84 percent and raised its full-year sales forecast. Orders at Alstom, the world's third-biggest maker of power stations, rose to a five-year high in the three months through June, the French company said last month.

"The economic environment remains largely favorable in the second half of 2006," ThyssenKrupp chief executive officer Ekkehard Schulz said.

Services, the biggest part of Europe's economy, are also growing. Randstad Holding, the world's fourth-largest temporary employment agency with its headquarters in Diemen, Netherlands, said last month that second-quarter profit had risen 33 percent, boosted by German demand. The unemployment rate in the euro region fell to 7.8 percent in June, the lowest since August 2001.

Germany, Europe's largest economy, grew a faster than the expected 0.9 percent in the second quarter, the country's statistics office said in a separate report Monday. Growth in Spain and France also accelerated in the three months through June.

Investors increased bets that the ECB would raise its key lending rate to 3.5 percent, futures trading showed. The yield on the three-month contract for December rose to 3.67 percent, from 3.64 percent late last week.

The ECB on Aug. 3 raised the benchmark refinancing rate to 3 percent, the fourth such step in eight months, and said further increases might be "warranted." Inflation rates "are likely to remain above 2 percent" in the second half of 2006 and in 2007, the Frankfurt-based bank said in its monthly report issued Aug. 10.

"The ECB will be happy to continue tightening," van Vliet said. "It will use its window of opportunity to take its rate to more normal levels because current inflation is still very high."

The ECB is concerned inflation will accelerate as economic growth picks up and workers demand higher wages to compensate for surging energy costs. Near-record oil prices and faster growth pushed inflation to 2.5 percent in July, keeping it above the ECB's limit of just below 2 percent for an 18th month.

Crude oil was trading at $73.60 a barrel in New York on Monday, compared with a record $78.40, reached July 14.

A survey of professional forecasters by the ECB shows analysts have raised their expectations for inflation this year to 2.3 percent, from a prediction of 2.1 percent published in May. Inflation may slow to 1.9 percent in 2008, the survey showed.