Europe takes the baton (Q2 07)

Europe looks set to take over from the US as the strongest-growing region of the developed West this year, driven by the continued strength of the euro-zone and, in particular, Germany. Although the boom in the industrial sector may be past its peak, there are encouraging signs that consumers are about to join the party. Accordingly, we now expect the euro-zone economy to grow by around 2.7% this year – outperforming both the US and UK for the first time since 2000. Although inflation remains subdued, the strength of activity will prompt the ECB to raise interest rates at least twice more to 4.25%, maintaining the upward pressure on euro-zone bond yields and the euro.