Exports, investment and household demand boosted euro zone economic growth at the end of last year, data showed today.
EU statistics office Eurostat confirmed its earlier estimate that the economy in the-then 12 countries using the euro grew by 0.9 per cent in the final three months of 2006 against the previous quarter, putting full-year growth at 2.7 per cent - the fastest annual expansion since 2000.
Although retail sales fell more than expected in January in the wake of the 3 percentage point VAT rise, economists said other indicators such as a tightening labour market showed the economy continued to do well.
But consumer spending fell at the start of 2007 after a rise in German VAT.
Markets expect the European Central Bank (ECB), which wants to keep consumer price growth just below 2 per cent in annual terms, to raise interest rates by 25 basis points on Thursday to stem inflationary pressures from the relatively fast-growing economy.
The ECB is concerned that with the labour market tightening in the euro zone, workers might demand wage increases higher than productivity growth, which could push up inflation.
The European Commission stuck to its forecast for quarterly euro zone growth of 0.4-0.8 per cent in the first three months and marginally raised its projection for the second quarter to 0.5-0.9 per cent. It kept its third-quarter growth view at 0.3-0.9 per cent.
The fourth-quarter growth in 2006 was driven mainly by a positive 0.8 percentage point contribution from net trade and 0.3 point contributions from investment and household consumption.
Germany and the European Commission have said the negative impact of the VAT rise on growth was likely to be smaller than initially expected. In February, the commission raised its forecast for German growth this year to 1.8 per cent from 1.2 per cent.