Oil price to hit eurozone recovery

THE eurozone economy is picking up momentum, the European Central Bank says, but strong oil prices could derail the recovery.

In its monthly bulletin, the ECB says the Eurozone economy has grown steadily helped by the international upturn led by the US, but it warns that it could be damaged by soaring fuel costs.

"The governing council remains confident that the improvement in economic activity will continue. The conditions for a broadening and strengthening of the upturn are in place," the bank said in its August report.

"On the other hand, high oil prices may dampen growth dynamics, both globally and through their impact on the euro area's terms of trade."

European inflation has risen higher than the ECB's target of 2% for much of the year, mainly because of the jump in oil prices.

"Concerns relate, in particular, to the continued high level of oil prices, which may be sustained by the strength of global economic growth," the bulletin said.

Economists here said the report indicates the ECB are paving the way for a hike in interest rates later this year or early next.

Austin Hughes, chief economist with IIB Bank, says the rising concern for inflation indicates that a tightening of rates is on the cards for December.

"While the tone of the ECB monthly bulletin for August is only subtly different from that of July, we think it suggests that a process of preparing the market for an eventual rate hike is underway. The next stage will likely come in September with an upward revision of ECB inflation and growth forecasts.

"Although the ECB is mindful that the global outlook is still somewhat uncertain, we think it is slowly edging towards an end-year rate hike," said Mr Hughes. There was a further boost to the European economic recovery yesterday with new data showing that France and Germany - the two biggest Eurozone economies and both suffering from years of deterioration - have begun to grow at a healthy rate.

Germany's economy grew by 0.5% between April and June, while France's grew at an impressive 0.8% over the same period.

However, the euro region's second-quarter growth probably won't prevent it lagging the rest of the world this year.

The International Monetary Fund forecasts expansion of 2% for the region compared with 3.5% for the US and 3.4% for Japan. Euro-region growth has lagged the US in 11 of the past 12 years.

"The euro region has not managed to generate a dynamic, self- sustaining recovery,' said Thomas Mayer, chief European economist at Deutsche Bank in London.

Germany's economy, which accounts for about one third of euro region GDP, relied on exports to drive its "slight" recovery in the second quarter amid "pretty much stagnant" domestic demand, Germany's the Wiesbaden-based statistics office said.