MNI SOURCES: Growth Rises Up List Of ECB's Concerns

MNI (LONDON) - Increasing risks of weaker-than-expected eurozone growth are rising up the European Central Bank’s list of concerns, with more dovish Governing Council members arguing these are now as important a factor as geopolitical uncertainty and some hawks beginning to agree, Eurosystem sources told MNI.

After stronger-than-expected Q1 GDP numbers, there is a risk that the economic pickup foreseen for the second part of the year will not materialise, potentially dragging down inflation in 2025, sources said, pointing to weakness in recent PMI data.

While a wide range of officials share concerns over growth, they are felt most acutely by dovish Governing Council members, who see the issue as an additional argument for the rate cut widely expected at the September meeting. At least one member of the Executive board also has concerns growth could be weaker than expected, although a soft landing for the economy remains the base case. (See MNI SOURCES: September Rate Cut In Sight For ECB)

“I would say that growth risks are big. Investment keeps being flat,” said one national central bank official, adding that there was now a danger the ECB could undershoot its inflation target next year

The same geopolitical factors which could feed prices could also weigh on demand, another source said.

“That is why we have to be very careful when watching the data, in the balancing act on timing further cuts between price risk and growth risk," the source said. (See MNI SOURCES: Fed, Geopolitics, Feed ECB Caution Over Cuts)

GEOPOLITICAL RISKS

But many Governing Council members continue to regard geopolitical risks, including those of a renewed energy price surge, as the main challenge to the task of bringing inflation to target, with some also warning that inflation expectations could become dislodged if this process extends beyond 2025. (See MNI INTERVIEW: Vital ECB Returns Inflation To 2% By 2025 - Wunsch)

Given this background of uncertainty, the ECB’s statement next week is unlikely to clearly signal the cut most officials expect for September, one source said.

“July will almost certainly be a hold. I don’t think there will be a direct point to September, although there will likely be a repetition that data continues to fall broadly in line with projections, one official said.

Still, even hawkish officials acknowledge that the prospect of faltering growth is becoming a problem.

“The base case is still a recovery, but I would agree with others that it is a weak recovery, weak in the sense that growth is not very high, and we don’t need much bad news for it to move in the wrong direction,” a source from one of the hawkish central banks said.

 “Weak recovery can become more of an issue if the geopolitical risks don’t materialise.”

LONG-TERM CONCERNS

But another hawkish official remained confident that consumption will pick up in the second half of the year, adding that the fact that growth was already weak in the ECB’s projections showed that “small downward changes do not change much”.

While minimising the short-term implications for policy of a decelerating economy, other hawks acknowledged the longer-term risks from a widening output gap with the U.S.  due to lagging competitiveness and lack of investment.

“If it is really a long-lasting period of no growth we may act, if it's only one quarter probably not,” one such source said.

An ECB spokesperson declined to comment.