There was a pause in growth in a number of European economies around the end of 1995, with weak domestic demand leading to moves to return stocks to more normal levels. This was exacerbated by bad weather in the first quarter of 1996. Rather pessimistic conclusions were widely drawn from these few months, but recent developments, especially in Germany have made us, and others, more optimistic about the short-term prospects. In the EU as a whole output rose by 0.49 per cent in the first quarter. Whilst output in France and Italy appears to have declined in the second quarter, in part due to statistical factors arising from the extra working day in the first quarter, growth remained at or above trend levels in the UK, Spain, the Netherlands and Denmark, and recovered significantly in Germany. Industrial output in Germany rose continually in the six months to August, with manufacturing output at its highest level since 1992. This has begun to be reflected elsewhere in the EU, with industrial confidence rising for the first time in 19 months.