MNI POLICY: Dip in manufacturing could spread - ECB's Makhlouf

By Luke Heighton

     FRANKFURT (MNI) - The slowdown in euro area manufacturing may already have

spilled over into labour markets, the governor of the Central Bank of Ireland

indicated Wednesday, as he underlined the negative economic effects of ongoing

US-China trade tensions and the uncertainty caused by Brexit.

     Makhlouf also highlighted financial stability concerns, pointing to the

growth in market-based finance as an additional source of vulnerability, and

said the European Central Bank should be prepared to "challenge familiar

paradigms and theories" in response to prolonged low inflation.

     Here are the key points from the speech in Waterford, Ireland:

     --Makhlouf described the macroeconomic outlook as "mixed," with the global

economy experiencing a synchronised slowdown as a result of rising trade

barriers and geopolitical uncertainty, while low productivity growth and ageing

demographics in advanced economies are also contributing to the sluggish

dynamics.

     --Makhlouf pointed to the risk that weaknesses in Europe's manufacturing

sector, and in Germany in particular, might spread to services. Although the

services and construction sectors continue to support growth, and the labour

market has "held up [...] employment and wages are often lagging indicators.'

     --Market-based finance "provides a valuable alternative to bank financing

for many businesses and households, supporting economic activity," Makhlouf

said. "But these activities may also give rise to financial vulnerabilities,

which need to be understood, monitored and addressed." This is particularly

important," he added "given the 'lower for longer' monetary policy environment

we find ourselves in," as "leverage, maturity and liquidity mismatches have been

at the heart of many previous financial crises. Although we may find less of

that in the banking sector now, similar mismatches could create vulnerabilities

if they emerge in the non-bank sector."

     --Makhlouf endorsed calls for a formal review of ECB monetary policy

strategy, which he said would provide an opportunity to take on board the

lessons of the financial crisis as well as the experience of a low-inflation

environment. "We must be ready to challenge familiar paradigms and theories,

however uncomfortable this may be," he said. "I don't just mean with respect to

how we think about economic policy, but our openness to different ways of

thinking, even where we find it challenging. We saw in the financial crisis how

the simultaneous failures of Irish institutions resulted from bandwagon effects

both between institutions (herding) and within them (groupthink), reinforced by

a widespread international belief in the efficiency of financial markets."

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

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

[TOPICS: M$X$$$,M$$EC$]