Economic Growth in the Euro Zone

It looks like the economy of the EU may actually experience faster growth than the US economy in 2006, for the first time in several years. New data out today from Europe indicate solid growth there. From the Wall Street Journal:

BERLIN – The euro-zone economy grew by 0.5% in the third quarter, less than forecast but enough to keep the region on course for its strongest economic expansion in six years.

France's surprise stagnation last quarter weighed on the 12-nation euro zone's overall growth rate, which economists had expected to be about 0.7%.

Strong growth in Germany, which expanded 0.6% from the previous quarter, and Spain, where quarterly growth hit 0.9%, propped up the overall figure for the euro zone. Spain's economy continued to be driven mainly by consumer spending and construction, while Germany's government said exports, business investment and consumer spending all contributed to growth.

Economists said the euro zone's slight slowdown last quarter may have been a partial correction from particularly strong growth in the second quarter, when the region's economy expanded by 0.9%, unusually fast by European standards.

The latest growth data, combined with strong business surveys, still back up the European Central Bank's view that the 12-nation currency area is heading for growth of around 2.5% this year, the region's fastest pace of growth since 2000. The ECB is widely expected to raise its key interest rate by a quarter point to 3.5% next month.

Another couple of interest rate hikes by the European Central Bank seem entirely possible. Coupled with some possible (or even likely) cuts in interest rates in the US next year, we could well see short-term US interest rates drop below European rates in 2007.