The euro zone appears to have achieved solid third quarter growth after industrial production in its biggest economies beat forecasts, cementing expectations the European Central Bank will raise rates again by year-end.
Data on Monday and Tuesday showed August industrial output surpassed expectations in Germany, France and Italy, which together account for some two thirds of the euro zone economy.
That fitted well with the rosy assessment of the growth outlook from euro zone finance ministers meeting in Luxembourg on Tuesday and gave economists another reason to expect the ECB would tighten monetary policy again in the next two months.
"There has been a pick up in industrial production in the large countries, particularly in Germany and Italy, and we should see robust levels of activity in the third quarter," said Nick Matthews, European economist at Barclays Capital in London.
"While we saw the peak of gross domestic product growth in the second quarter, growth should remain above potential in the third quarter and strong in 2006 overall. That means the ECB will be looking to raise rates in December."
He said he was expecting euro zone industrial output to post a monthly rise of at least 1 percent in August and pencilled in quarterly euro zone growth of 0.7 percent in the third quarter.
While that would mark a slowdown from the second quarter, when the euro zone economy grew 0.9 percent, its fastest quarterly pace in six years, it would still put the bloc's 2006 growth rate at about 2.7 percent, Matthews added.
STELLAR GERMAN PERFORMANCE Industrial output in Germany staged its biggest annual increase since German re-unification in 1990 by surging 7.3 percent in seasonally-adjusted terms in August, Monday's data showed.
Robust export activity reported in the same month added to hopes that growth in Europe's biggest economy would prove stronger than many had expected in the third quarter. Italian production also put in a good performance in August, rising by a seasonally-adjusted 1.2 percent compared with the previous month with an upward revision to July's data.
While statistics office ISTAT cautioned that August was a volatile month for output as many factories are closed for summer holidays, it was still the strongest rise since December 2005 and more than twice the pace expected by the consensus.
"The output picture for the third quarter is now very encouraging," said UBM economist Marco Valli. "Even though the trend in services points to a slowdown, I think I may revise up my estimate of 0.4 percent GDP growth for the third quarter."
France also managed to beat economists' expectations, though its 0.8 percent monthly rise in output in August sparked less applause from economists than the German data since it marked only a partial reversal of July's 1.4 percent decline.
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