Euro zone growth is gaining momentum as business investment booms although private consumption remains hesitant, the European Commission said today.
The euro zone economy grew 0.6% in the third quarter of this year after growth of 0.4% in the second quarter, the EU's executive arm predicted in its quarterly report on the bloc, without offering a forecast for the fourth quarter.
In the third quarter, the commission saw the euro zone economy expanding on an annual basis at a rate above the bloc's estimated potential growth rate of about 2%. Looking ahead, the commission stuck to previous estimates for growth this year of 1.3% and 1.9% next year.
'Gross domestic product growth in the euro area accelerated to rates above potential in the third quarter of 2005 and leading indicators suggest that economic activity remained sustained during the last months of 2005,' the commission said.
'Although private consumption is improving only gradually, domestic demand is finally showing signs of a significant strengthening on the back of a recovery in investment which recorded its strongest increase in the last five years,' it added.
However, household consumption would benefit from the creation of new jobs as the jobless rate eased timidly lower to 8.4% in 2006 from 8.6%.
The euro zone economy would continue to benefit from low interest rates although the European Central Bank (ECB) lifted its benchmark rate to 2.25% at the beginning of the month. 'Most market participants anticipate only a moderate increase of interest rates, pricing in another two 25 basis points hikes in 2006,' the commission said.
The ECB has begun lifting its interest rates in order to keep in check soaring inflation, fuelled by strong oil prices. The Frankfurt-based central bank, whose main mission is to ensure price stability in the eurozone, has been concerned about signs that high oil prices are feeding into other costs through second-round or indirect effects.
The commission warned that dreaded indirect effects of oil prices were likely to have a greater influence on inflation in the coming year.
'Indirect effects, which occur when producers pass through higher input costs into their final prices, are beginning to be felt but they have so far remained modest and masked by favourable developments in unit labour costs,' it said. 'However, in 2006, indirect effects could exert more significant upward pressures on inflation,' it added.
