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ECB chief warns of headwinds for the eurozone economy

The markets are fretting over Brexit and its fallout, slowing China growth and the US-China trade spat

Frankfurt

EUROPEAN Central Bank (ECB) chief Mario Draghi on Thursday warned that risks to the eurozone economy were growing, acknowledging for the first time that waning global momentum was weighing on the region's outlook.

"We were unanimous about acknowledging the weaker momentum and changing the balance of risk for growth," he told reporters after the ECB's first governing council meeting of the year.

The warning comes amid mounting concern about the economy, as markets fret over Brexit, slowing Chinese growth and the fallout from US-led global trade tensions.

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"The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility," Mr Draghi said.

The latest hard and soft economic data have "continued to be weaker than expected", he added, blaming "softer external demand and some country- and sector-specific factors".

Eurozone growth slowed to 0.2 per cent in the third quarter of 2018, after an expansion of 0.4 per cent in the two previous quarters.

Most experts believe the fourth quarter figures will also disappoint.

Uncertainty over how Brexit will pan out, and notably its knock-on effects, are a major factor behind a downgrade of the ECB's view on economic risk, Mr Draghi said. "If you compare potential disruption coming from Brexit to the aggregate of the eurozone ... it doesn't seem to be extensive. But we have to take into account items like value chains (and that) ... some countries are more exposed to events in the Brexit case."

The darkening clouds come after the ECB in December ended a massive government and corporate bond-buying scheme that had been propping up the eurozone economy.

Under the easy-money scheme, the Frankfurt institution pumped 2.6 trillion euros into the eurozone economy over a nearly four-year period.

Its end marked the removal of a key pillar of support to the economy, with the ECB saying it was confident the region could weather upcoming headwinds and that inflation was on track to meet the bank's goal of just under 2.0 per cent.

Since then however, the International Monetary Fund (IMF) has downgraded its 2019 growth forecast for the 19-nation currency bloc to 1.6 per cent - slightly lower than the ECB's 1.7-per cent estimate.

Meanwhile, eurozone inflation has fallen back - notching up just 1.6 per cent in December.

Mr Draghi on Thursday stressed that the ECB's record-low interest rates and the reinvestments from maturing bonds would continue to support eurozone growth in the near future. He added that policymakers assessed "the likelihood of a recession as being low".

And he said that the ECB is "not out of instruments" to face economic headwinds.

The bank left its policy stance unchanged as expected on Thursday; it kept a rate hike later this year on the table, even as the eurozone economy suffers its biggest slowdown in half a decade.

The ECB's deposit rate, now its main benchmark, remains at -0.40 per cent, while the main refinancing rate, its key rate during normal times, stands at 0.00 per cent. AFP, REUTERS