Inside the Eurozone

While growth forecasts are improving in the U.S., overall views on European growth haven’t changed much. Growth has been relatively strong in the Eurozone, with a 3.0-percent first quarter GDP reading. Ideaglobal’s Powell notes that figure is above the Eurozone’s so-called “potential rate” of growth, or the rate at which non-inflationary growth can be sustained (currently 2.25 percent).

The ECB hiked its repo rate 25 basis points to 4 percent in early June in response to the stronger-than-potential growth numbers. Economists expect the central bankers to hold steady at the July 5 meeting, but the market is pricing in an additional one or two rate hikes between now and year end to 4.25 or 4.5 percent.

“They are still stepping on the gas,” Glassman says. “They’ve had relatively low rates, but the Europeans have a little more work to do to normalize their rates. The market thinks another 50 basis points.

” Overall, economists say growth in the Eurozone has been fairly broadbased, including government spending, robust consumption, and export performance.

Germany posted a 3.6-percent firstquarter GDP reading, while Spain’s growth numbers surged by 4.0 percent. Germany, one of the main engines of growth for the Eurozone, continues to boast favorable forecasts for the remainder of the year. Spain, however, may be worth watching.

“The Spanish economy has been on fire fueled by a housing and construction boom,” Powell says.

Given the fast pace of growth in housing, a retreat in that sector could cause problems for Spain’s economy later in the year.

The ECB has forecast Eurozone growth in 2007 between 2.3 and 2.9 percent, with a slowdown predicted for 2008 (between 1.8 and 2.8 percent).

“Ideally, hey’d like growth at 2.25 percent,” Powell says. “Due to structural rigidities, including labor markets and slower levels of productivity growth, their potential growth rate is slower than the U.S.”