MNI: ECB Sees Eurozone Growth As Solid, Despite Global Risks

By Luke Heighton

     LONDON (MNI) - The euro area economy is proceeding along a "solid" and

"broad-based" growth path, despite persistent heightened market volatility and

the ongoing threat of protectionism to the global economy, the European Central

Bank's (ECB) latest Economic Bulletin reports.

     Data published since the Governing Council's June 14 meeting offered

further grounds for cautious optimism, the report argued, supporting July's

decision to reaffirm ECB plans to progressively wind down its asset purchasing

programme by the end of December 2018, while keeping key interest rates

unchanged until at least the summer of 2019.

     The Bulletin pointed to global survey indicators continuing to suggest

steady growth momentum for Q218, with the Purchasing Managers' Index (PMI)

excluding the euro area increasing slightly to reach a four-month high, as a

moderate decline in manufacturing was significantly offset by an uptick in the

services sector.

     According to the Bulletin, the "latest economic indicators have stabilised

and continue to point to ongoing solid and broad-based growth, albeit at a

slower pace than in 2017."

     "Private consumption continues to be supported by ongoing employment gains,

which, in turn, partly reflect past labour market reforms, and by growing

household wealth," it added.

     "Business investment is fostered by the favourable financing conditions,

rising corporate profitability and solid demand. Housing investment remains

robust. In addition, the broad-based expansion in global demand is expected to

continue, thus providing impetus to euro area exports," the Bulletin stated.

     Looking ahead, the Bulletin noted underlying inflation is expected to pick

up towards the end of the year and "thereafter to increase gradually over the

medium term, supported by the ECB's monetary policy measures, the continuing

economic expansion, the corresponding absorption of economic slack and rising

wage growth".

     --TRADE RISKS

     Yet despite the risks surrounding the euro area growth outlook appearing

"broadly balanced", the threat of protectionism remains "prominent", it was

noted, while "persistent heightened financial market volatility continues to

warrant monitoring".

     Downside risks to the global economy intensified in the wake of the first

wave of US tariffs on Chinese imports that took effect on July 6, with further

tariffs -- and Chinese retaliation -- expected, alongside European and Canadian

measures to counter the tariffs already imposed on steel and aluminium, the

Bulletin added, amid a general loss in trade momentum over the last five

months..

     "Overall, if all the threatened measures were to be implemented, the

average US tariff rate would rise to levels not seen in the last 50 years. These

developments constitute a serious risk to the outlook for global trade and

activity in the short to medium term".

     --FED IMPACT

     The ECB noted the impact the increased policy rates imposed by the Federal

Open Market Committee in June are likely to have on emerging market economies --

with forward guidance indicating a total of four rates hikes in 2018 -- while

stressing that overall monetary policy in advanced economies remains

accommodative.

     The report pointed to a decline in China's stock prices, a "slight

moderation" in GDP growth, and the presence of"some depreciation pressures" on

the renminbi, and suggested that while Japan is likely to recover from a "mild

contraction" in the first quarter of 2018, "the outlook is surround by growing

uncertainty".

     The ECB Bulletin did not appear to take account of last week's decision by

the Bank of England to raise interest rates by 25bps -- instead referring to

them as having been "maintained" -- and described the weakening in UK GDP growth

over the first quarter of 2018 as likely to be "temporary".

     Nevertheless, "Short-term indicators for the export-oriented manufacturing

sector signal a less optimistic outlook. This is in line with an environment of

heightened uncertainty, particularly regarding the outcome of the negotiations

on the country's withdrawal from membership of the European Union in March

2019," the Bulletin noted.

     Euro area government bond yields fell from June 14 to 25 July 25, 2018,

with the GDP-weighted euro area ten-year sovereign bond yield decreasing by 7

basis points to 1.04%, amid what the report described as "receding tensions in

the sovereign debt markets and declining risk-free rates", The spread on euro

area equity prices experienced a "correction" amid rising trade tensions, the

Bulletin stated.

     The effective exchange rate of the euro, measured against the currencies of

38 of the euro area's most important trading partners, strengthened by 1.6%. The

euro remained broadly unchanged against the US dollar over the same period.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

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