REPEAT: MNI SOURCES: ECB Conundrum Over EZ Slowdown: ESCB Srce

Repeats Story Initially Transmitted at 06:55 GMT Jul 18/02:55 EST Jul 18

--Clearer Reading Maybe In October; Trade Wars Key Factor

--Uncertainty Raises Risks For MonPol Transmission

--Germany, France Deceleration Poses Growth Issue For Entire EU

     LONDON (MNI) - The European Central Bank still faces the conundrum of

whether the current eurozone-wide economic slowdown is temporary and, if it is,

how this could affect monetary policy goals, a Eurosystem source told MNI. 

     "Even if the downturn is only temporary, it sill raises risks for the whole

bloc and by extension to monetary policy transmission," the source said. 

     The nature of, as well as the duration of, the downturn is a matter of

concern, whether attributing it to a rise in global trade tensions or if there

are other "endogenous" factors at play, yet to be fully framed. 

     The official was keen to stress that even if the ECB had not been

"premature" in announcing the likely end of its asset purchase program (APP) in

December, economic growth, though progressing, remained subdued across the union

and this was not an encouraging sign. 

     "We made it very clear at the June meeting that progress towards our

inflation target remains substantial but at the same time the core (inflation)

component remains low and uncertainty has not been fully dispelled. Wide margins

of uncertainty do persist so its best be cautious and keep our feet on the

ground," warned the source.

     Recent data is far from reassuring. Eurosystem central bank projections

published in June indicate that for 2018 as a whole GDP should grow by 2.1%, a

slight downward revision on the March estimate. European Commission forecasts

published last week offered a similar outlook to the updated Eurosystem

forecasts.

     --MAIN ENGINES SLOWING

     But what is a major concern to policymakers and Eurosystem officials is

slack in the two main economic engines of the union -- France and Germany -

rather than in the usually sluggish and indebted southern periphery. 

     "Latest indicators suggest that GDP will continue to expand at a subdued

pace in the second quarter of this year as well, but what is really of concern

is the ongoing deceleration occurring in France and Germany, which in the first

quarter was more marked than in other members states," noted the source. 

     So the fact that the slowdown is affecting the whole eurozone and not just

the margins is even more alarming, leading policy makers at the ECB to start

questioning the existence of a growth "problem", even if momentary and primarily

tied to a slowdown in global trade. 

     The ECB certainly has concerns over the impact of a trade dispute, with

sources at the recent European Council meeting in Brussels noting President

Mario Draghi expressed concerns for the Eurozone economy, particularly if the

dispute expanded into the auto sector.

     MNI has been told by summit insiders that Draghi stressed there is no

scientific way of measuring the impact from any disruption in the global

production and supply chains that underpin the sector, as it was impossible to

tell whether global supply chains could be recreated on a more local footing.

     --MORE TIME

     It is clear that more time will be needed to fully read and frame the

extent of the slowdown, with a clearer picture available not before September or

October and perhaps even later. 

     "It is quite hard to interpret growth dynamics during the summer ... to

whether this slowdown is temporary or not," said the official, adding that

sometimes it takes years to get a clear reading into certain lesser-performing

economic phases. 

     Asked whether the Governing Council had perhaps been too confident

announcing in June the APP tapering and December end given the uncertain

outlook, the official replied that it had been a wise and well-studied move.

     "It is crucial to prepare the ground by communicating the APP termination

well ahead of time so to avoid triggering market turmoil. This too is part of

our gradual approach". 

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