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ECB's Praet Sees No Reason to Worry Over Euro-Area Slowdown Yet

ECB's Praet Sees No Reason to Worry Over Euro-Area Slowdown Yet

(Bloomberg) -- The European Central Bank’s chief economist, Peter Praet, reaffirmed confidence in the euro area’s upswing despite another day of gloomy economic data.

“There is so far no evidence that the moderation in the pace of economic expansion reflects a durable softening in demand,” the Executive Board member said in a speech in Geneva on Monday. “Recent information remains consistent with a solid and broad-based expansion in domestic demand.”

In the hours before the remarks, reports showed factory orders in Germany falling for a third month, investor confidence in the euro area declining for a fourth month, and a survey suggesting that retail sales in the bloc contracted for the first time in more than a year. All the data point to faltering economic momentum, albeit after the strongest growth in a decade in 2017.

Praet’s comments largely reflect the ECB’s stance that the slowdown is probably just a adjustment to a more sustainable pace of expansion, along with temporary factors including the timing of Easter holidays and the winter flu epidemic. Still, policy makers at last month’s meeting opted not to discuss how and when to wind down their stimulus program, deciding instead that they need more time to assess the outlook.

Praet acknowledged the weakness came “sooner than anticipated” and suggested that at least part of it could be a consequence of more structural factors.

“The recent slowdown could also be a sign that supply-side constraints are becoming increasingly binding, albeit only in some sectors and in some countries. For instance, in the capital goods sector, capacity utilization and backlogs/supply delivery times stand at all-time highs.”

Another mounting risk is a protectionist spiral, which could damage confidence even before actual tariffs start to bite. ECB research warned on Monday that a trade war between the U.S. and China would undermine the global economy, adding that the U.S. itself would probably be hit severely.

In his speech, Praet downplayed another concern, that the euro’s gain over the past year would curb exports. He said the evidence for such an impact is “limited,” though he noted that the “sharp decline in some sentiment indicators relating to the export sector is a source of concern.”

For now, he backed the ECB’s view that an ample degree of monetary stimulus remains key to ensure the institution eventually meets its euro-area inflation goal of just under 2 percent. The rate was 1.2 percent in April.

“Measures of underlying inflation have moved sideways in recent months and have yet to show convincing signs of a sustained upward trend,” he said. “Looking ahead, monetary policy will evolve in a data-dependent and time-consistent manner.”

To contact the reporters on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net, Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Kevin Costelloe

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