By Paul Hannon
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Long a notable laggard in the global economy, the euro zone now appears set for its strongest annual growth performance since 2000.
Figures released Monday by the European Union's statistics agency Eurostat show that in the second quarter, gross domestic product in the 12 countries that share the currency grew by 0.9% from the first three months of the year, and by 2.4% from the second quarter of 2005.
That quarterly growth rate was the highest since the second quarter of 2000, a year in which the euro-zone economy expanded at the now scarcely imaginable rate of 3.9%.
Economists aren't suggesting that the world's second largest economic area will repeat that stellar performance this year, but they are now beginning to pencil in annual growth rates of as high as 2.5%, almost twice the 1.3% recorded in 2005.
Barring unusually large revisions to the preliminary estimates, the euro zone was far and away the fastest growing of the major economies. U.S. GDP expanded by 0.6% in the second quarter, while the Japanese economy grew by only 0.2%. The U.K. posted 0.8% growth in the second quarter.
The last time the euro zone grew more strongly than the U.S. economy was in 2001, when the latter experienced a mini-recession.
"For once, the euro zone has taken the lead," said Holger Schmieding, an economist at Bank of America.
As important as the surprising strength of the pickup in growth was the broad geographic spread of the trend. Three of the euro-zone's four largest economies - Germany, France and Spain - expanded by 0.9% or more, while the Italian economy grew by a more modest 0.5%.
While details on growth components won't be available until later this month, what can be gleaned from national economic data suggest that the second quarter marked a broadening of growth across sectors, with domestic demand increasingly stepping up to support a still-healthy export performance as businesses invested and consumers spent more.
"The cyclical dynamic has clearly risen during the first half of this year," said German Economics Minister Michael Glos. "The economic upswing has gained in momentum and became more broadly based."
However, few expect the euro zone to top the growth league tables for very long, and the second quarter may well have marked the peak for quarter-on-quarter growth, although year-on-year growth rates are likely to continue to rise.
Once reason for expecting the euro-zone economy to slow is the European Central Bank's likely reaction to the second-quarter figures. The central bank has already raised interest rates four times since December, to 3.0% from 2.0%.
As the second-quarter performance was stronger than the ECB had forecast, it should have removed more spare capacity that the central bank had anticipated, thereby fueling inflationary pressures.
"The upward surprise, plus a more domestically-driven growth composition, will reinforce the conviction at the ECB that the recovery is self-sustaining and a further withdrawal of policy accommodation is appropriate," said Ken Wattret, an economist at BNP Paribas.
With 2006 shaping up to be the euro-zone's strongest for half a decade, investors are increasingly expecting the ECB to raise interest rate twice more before the end of the year, bringing its benchmark rate to 3.5%, a level last reached in 2001.
But further rises in interest rates are not the only threat to euro-zone growth prospects.
"We suspect that the second quarter may mark the peak in euro-zone growth," said Howard Archer, an economist at Global Insight. "A stronger euro, slowing global growth, very high oil prices .. and tighter fiscal policy in several countries threaten to exact an increasing toll on euro-zone growth going forward."
Euro-Zone Second Quarter Growth By Country
On Quarter On Year
Austria 1.0% 3.1%
Belgium 0.8% 2.8%
Finland n/a n/a
France 1.2% n/a
Germany 0.9% 2.4%
Greece n/a n/a
Italy 0.5% 1.5%
Ireland n/a n/a
Luxembourg n/a n/a
Netherlands 1.0% 2.4%
Portugal n/a n/a
Spain 0.9% 3.6%
-Paul Hannon; Dow Jones Newswires; 44-20-7842 9491; email@example.com
(END) Dow Jones Newswires
August 15, 2006 01:45 ET (05:45 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.