MNI INTERVIEW: Eurozone To Remain Sluggish In H1: OECD's Boone

--Trade, Manufacturing Suggest Weak H1 In Eurozone, Despite Recent Good Data

--China Stimulus Could Backfire, OECD Economist Boone Says

By David Thomas

     BRUSSELS (MNI) - Continuing weakness in manufacturing and trade suggest

eurozone economic activity will remain sluggish in the first half despite recent

brighter data, OECD Chief Economist Laurence Boone told MNI, in an interview in

which she also pointed to the risk that China's stimulus could backfire.

     "We have seen a slightly better Q1 than expected, but at the same time we

are still seeing manufacturing slowing down and trade within the eurozone

continuing to slow ... and surveys continue to suggest weakness," Boone said on

Friday.

     That is despite some signs of China's stimulus programme starting to take

effect and an improvement in financial conditions following the Fed's policy

shift.

     "What has changed since March, when we published our interim forecast? We

are seeing some sign of the China stimulus programme kicking in, we are seeing

some softening of financial conditions compared with December and the Fed move."

     But she said potential risks continue to emanate from China as it seeks to

support its economy.

     "China is experimenting with stimulus and playing with tax policy. There is

significant uncertainty about the extent and effectiveness of the fiscal

measures, so there may still be some volatility."

     While financial conditions have improved, a strengthening dollar is a

strain on emerging countries with high levels of debt in U.S. currency, Boone

said, adding that emerging stress could well ricochet back onto the eurozone:

     "Turkey, for example, is an important export market for the eurozone. So if

you project a recovery in Turkey - as we ... do - then it obviously contributes

to the recovery in the eurozone too, but there is a lot of uncertainty going on

there."

     --TRADE RISKS

     Trade will remain a major source of concern even if a U.S.-China trade

agreement does materialise in coming weeks.

     "There will probably be a U.S.-China agreement, but it will not cover the

entire scope of the discussion, so some uncertainty will remain. And the U.S.

will now enter into trade discussions with the EU and that will create

uncertainty too. That issue is not disappearing".

     "Overall it looks a bit better in Q1, but the business and consumer surveys

are not great and the uncertainty dimension remains very much the same. So Q2

may not be as good as we had expected and our assessment so far is that the

first half of this year is expected to be very much in line with what we had in

March".

     Boone has called for a greater role for fiscal policy in tackling Europe's

slowdown. But, while that debate is winning hearts and minds, she said political

resistance in some countries may prevent proper coordination of fiscal efforts.

     "Thanks to low rates, euro area governments have in fact considerable scope

to elevate growth with fiscal policy and structural reforms. It would be super

helpful for Europe if policymakers were sitting around the table and discussing

coordinated actions. Why? Because, thanks to the single market, any policy

action lifting growth in one country benefits and spills over to the others."

     While there is still scope for the ECB to take action if required, monetary

policy has been "super stretched" during the crisis and the acquisition by

central banks during the crisis of unprecedented new powers has sparked

political resistance.

     "Politically it is better if we don't transfer all the weight of managing

the cycle to monetary policy because then it could create a backlash and

backfire. If it was the only game in town I have no doubt they (ECB) would use

all their tools - if there was a big crisis. But at this juncture I don't think

they need to do anything."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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