MNI ANALYSIS: Slowing Upswing, Trade Concerns Cloud EZ Outlook

--Growth Deceleration Signal To Flash On ECB Radar Ahead April Meet

By Christian Vits

     FRANKFURT (MNI) - Concerns over a trade war are beginning to weigh on

confidence in the euro area and will likely slow the economic dynamic over the

summer, the European Commission's latest Economic Sentiment indicator (ESI)

showed Tuesday.

     In March, the ESI decreased markedly in the Eurozone by 1.6 points to

112.6. Although this is the third consecutive drop, the indicator remains at

elevated levels and significantly above the long-term average of 100 points.

     Nevertheless, the decline will add to concerns at the European Central Bank

that economic momentum -- while still favourable -- is losing some steam and,

surrounded by increasing uncertainty, strengthening the position of those on the

Governing Council who argue for a cautious approach to exiting the bank's

extraordinary measures.

     --INFLATION OUTLOOK

     The inflation outlook also weakened in March, offering the central bank no

comfort as the apparent end of the asset purchase programme looms. Consumers,

along with businesses in both manufacturing and services saw selling price

expectations decrease.

     The deterioration in euro area sentiment resulted from drops in industry,

services and retail trade. Confidence among consumers remained unchanged, while

it increased among construction managers.

     The ESI weakened in all the five largest euro-area economies; significantly

so in Germany (-2.4), Italy (-1.8) and Spain (-1.2) and, less so, in the

Netherlands (-0.5) and France (-0.4).

     The debate about new trade barriers has already led to some concerns within

the ECB.

     "There are potential second-round effects that could have much more serious

consequences. These include the risk of retaliation across other goods ... and

the potential for negative confidence effects, which would weigh on business

investment in particular," ECB President Mario Draghi warned last week.

     ECB Governing Council member Jens Weidmann said Monday that it is in no

one's interest to spark a trade war. If anything, it should be the aim to reduce

existing trade barriers instead of avoiding new tariffs or keeping them low.

     --ROBUST GROWTH

     The decline in confidence starts from an exceptional high level, suggesting

the economic outlook has not darkened but has slowed somewhat.

     Germany's Ifo Institue expects a continued recovery in the euro area during

the first half of 2018. "Robust economic growth of 0.6% can be expected in the

first and second quarters of 2018," according to a joint projection of the

Munich-based economic think tank, the KOF (Zurich) and ISTAT (Rome). 

     "Growth will slow down marginally to 0.5 percent in the third quarter," the

report said.

     Still, Ifo highlighted a couple of risks to the outlook, including

"tensions in international trade after the tariff decisions taken by U.S.

President Donald Trump."

     In 2017, the United States and China continued to be the two main goods

trading partners of the European Union with 16.9% and 15.3% of total EU trade in

goods respectively.

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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