May 14 (Bloomberg) -- European economic growth probably slowed in the first quarter after higher interest rates and a sales-tax increase in Germany discouraged consumer spending, a survey of economists shows.

The economy of the 13 nations that use the euro expanded 0.5 percent from the fourth quarter, when it grew 0.9 percent, according to the median of 38 forecasts in a Bloomberg News survey. Growth may accelerate in the current quarter, according to the European Commission.

The impact of the increase in Germany's value-added tax was short-lived as declining unemployment and rising confidence helped spending recover. The European Commission last week raised its forecast for economic growth this year to 2.6 percent, close to the six-year high of 2.7 percent reached in 2006 and ahead of the U.S. for the first time since 2001.

``A lot of the weakness in the first quarter came from Germany, where the value-added tax hike left its mark,'' said Sandra Petcov, an economist at Lehman Brothers in London. ``Momentum is not as strong as in 2006, but it's still solid.''

The euro-region growth figures will be published at 11 a.m. in Luxembourg tomorrow. The commission, the European Union's executive arm in Brussels, said growth will accelerate to about 0.7 percent in the current quarter.

German Slowdown

Growth in Germany, the region's biggest economy, may have slowed to 0.3 percent in the first quarter from 0.9 percent in the fourth after Chancellor Angela Merkel raised the VAT Jan. 1 to 19 percent from 16 percent, a separate survey of economists shows. Growth may also have eased in Italy, while France probably maintained its pace of expansion.

Spain's economy, Europe's fifth-largest, grew 1 percent in the first quarter from the fourth, when it expanded 1.2 percent, its national statistics office said today. Spain, together with Germany, France and Italy, which are due to publish data tomorrow, account for about three-quarters of the euro area's economy.

Government reports in the last two weeks indicate the euro region's economy has recovered from the first-quarter slowdown. European retail sales increased the most in 10 months in April, and business and consumer confidence stayed close to a six-year high, according to industry surveys last month. Increased investment and hiring by companies pushed euro-area unemployment to 7.2 percent in March, the lowest since records began in 1993.

U.S. Economy

Much still depends on the U.S., where slowing economic growth may curb the global expansion and reduce demand for European goods. The U.S. economy, the world's largest, grew at the slowest pace in four years in the first quarter. Employment growth fell to the lowest in more than two years in April.

European Central Bank President Jean-Claude Trichet says Europe's economy is strong enough to withstand the U.S. slowdown. ``The medium-term outlook for economic growth in the euro area continues to be favorable,'' he said May 10.

Trichet was more concerned that faster growth would push up inflation, and signaled he will raise interest rates next month for the eighth time since late 2005. Europe's industrial production grew a faster than expected 0.4 percent in March from February, when it rose 0.5 percent, the EU's statistics office said in a report today.

`Pretty Elevated'

``All sectors posted pretty elevated year-on-year growth in production,'' said Howard Archer, chief European economist at Global Insight in London. The production report ``maintains the possibility that interest rates could edge up further in the second half of 2007.''

Inflation in the euro region probably slowed to 1.8 percent in April from 1.9 percent the previous month, which would be the eighth month inflation stayed below the ECB's 2 percent limit. Still, the commission on May 7 raised its inflation forecast for this year to 1.9 percent from 1.8 percent and said it expects an acceleration to about 2 percent next year. The April data will be published on May 16.

``Taking into account both short-term factors and underlying strength of money and credit, there are clear upside risks to price stability,'' Trichet said in Dublin May 10.

Investors expect the ECB will raise its benchmark rate again after an increase to 4 percent in June, futures trading shows. The yield on the three-month Euribor futures contract for December was at 4.36 percent today.

The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net

Last Updated: May 14, 2007 09:18 EDT