Euro Area Growth Broad-Based in Early 2006

The global economy continued to look robust at end-2006. In the U.S.A. private consumption increased, notwithstanding the protracted housing slowdown, and the services sector continued to grow at a dynamic pace. In view of the still buoyant economy, a cut in U.S. interest rates does not appear imminent. In Japan, the economic recovery persisted, leading the Bank of Japan to raise interest rates in February 2007 – for the first time since ending six years of zero interest rates in July 2006. In China and Southeast Asia, the rapid pace of growth continued to accelerate. In the euro area, real GDP growth accelerated in the fourth quarter of 2006 and is, moreover, increasingly being driven by domestic demand. The latest forecasts indicate above-potential GDP growth in 2007. Furthermore, the labor market developed favorably, with both the actual and structural unemployment rate down by a significant margin. Since September 2006, the rate of inflation has been below the 2% mark owing to, among other factors, the fall in crude oil prices and the hitherto weak pass-through of the increase in Germany’s VAT rate to consumer prices. In this climate the short-term prospects for price stability have improved as well.