--ECB: Monetary policy appropriate to keep price stability
--ECB: Eurozone slowdown due external climate, weak dom demand
--ECB: Worsening in external climate main risk to output growth
--ECB: Eurozone dom demand slowdown stronger than expected
--ECB: 2001, 2002 GDP to stay broadly in line with potential
--ECB: Inflation concerns over future wages may be justified
--ECB calls for public vigilance on prices during euro chge
--ECB: Risks to potential output revision "skewed to upside"
--ECB sees continued gth moderation in Q2, esp manufacturing
--ECB: Recent producer prices show upward pressures may ease
--ECB: Structural reform delays threaten mid-term gth chances
--ECB: Transparency, competition to limit euro chge price risks
--ECB: Little evidence of euro-zone productivity rise from IT
--ECB: Q1 GDP estimate "can be subject to significant revisions"
--ECB: Ind output in line with clear, protracted sentiment fall

By Allan Saunderson and Elena Logoutenkova
Frankfurt, July 12 (BridgeNews) - The European Central Bank said Thursday that the slowdown in euro-zone demand had been stronger than expected in the first months of 2001 and this had continued during the second quarter. Despite this, it said in its July monthly bulletin, "in the course of the year, domestic demand should gradually recover" due to sound economic fundamentals, ongoing tax reforms and favorable financing conditions.
In spite of the ECB's expectations, the tone of the bulletin analysis indicates that its uncertainty over estimates for area growth are deepening. Citing the Eurostat estimate of gross domestic product growth of a quarterly 0.5% in first three months of 2001--slower than the 0.6% of fourth quarter 2000--it said the slowdown "appeared related to the external environment and to the weak growth of domestic demand."
In the euro zone, investment was being affected by adverse influences from the world economy and specific domestic developments related to construction investment--a reference to ongoing over-supply in the east German building sector. The ECB added consumption was also weak, which may be explained by adverse income effects related to increases in energy and food prices. The bulletin added however, "data on industrial production growth in April and the confidence indicators up to June suggest a further moderation of growth in the second quarter of 2001."
Even if tax reforms and favorable financing conditions should underpin growth in the second half of 2001, "the main risk to output growth remains the deterioration in the external environment, as its extent and duration and its eventual impact on the euro area economy remain uncertain," it said. Just one week ahead of the next ECB governing council meeting, the bank reiterated that "the current monetary policy stance remains appropriate to ensure that price stability will prevail in the euro area over the medium term. Maintaining a favorable perspective for price stability is the best contribution which monetary policy can make to fostering sustainable economic growth."
There was no mention in the bulletin of the phrase "for some time to come" used by President Wim Duisenberg at the last press conference in connection with the current ECB monetary policy stance. This comment served to reverse then-growing market consensus that the ECB would cut its key interest rates again prior to the summer break between Aug. 2 and Aug. 30.
The ECB said real GDP growth in the euro zone was expected "to remain broadly in line with trend potential growth in both 2001 and 2002." The bank's economists, in a detailed analysis in the bulletin, hinted however that the estimate of growth potential of the euro zone could eventually be revised higher than the 2.25-2.50% it has used for its economic assessments so far. This is the rate of output that the ECB believes the region can sustain without sparking inflation via overheating.
Information and communication technology (ICT) had contributed to grow both in terms of production and investment in the second half of the 1990s, the analysis concluded. "However, there is--as yet--little if any evidence of positive spillover effects from the use of ICT to overall productivity growth," it said. "Further structural reforms are crucial in order to reap the full benefits of the new technological possibilities."
It added however "in itself the increased contribution of ICT to productivity growth... implies that uncertainties surrounding the estimates of potential output growth have become skewed to the upside." The ECB also builds the potential growth rate into its estimate for the allowable expansion of M3 money supply, its 'first pillar' of policy strategy. Were the ECB to raise this, it would imply an upward revision of the current 4.5% reference for M3 growth and therefore greater room to cut interest rates. Since productivity and potential growth improvements are linked to open market-oriented economies, the ECB has consistently called on euro-zone governments to implement structural reforms. The latest came when ECB board member for economics Otmar Issing warned in an essay this week that German governments had consistently refused to heed not only ECB calls on this, but also those of other supranational institutions.
The July bulletin said "the prospects for non-inflationary economic growth can be significantly enhanced only by decisive structural reforms. Structural reforms will also improve the resilience of the economy to adverse shocks. Delays, on the basis of cyclical considerations, in introducing such reforms would be at the expense of medium-term growth opportunities." On prices, the ECB reiterated expectations that the current higher level of harmonized inflation (HICP) reflected recent increases in food and energy prices and would have only a temporary impact.
If no further unfavorable shocks occurred HICP should slow during 2001 and reach rates of below 2% in 2002, it said, repeating its recent analysis. It added, "Recent data on producer prices in the euro area also indicate that upward pressures on prices further along the chain of production may gradually ease. The main risk related to this outlook is that the temporary increase in inflation will give rise to second-round effects having an impact on wage negotiations this year and early next year.
"So far, wage developments have been satisfactory although, with regard to the future some concerns may be justified."
The ECB said price transparency and market competition would limit possible inflationary pressures arising from the euro cash changeover due at the start of 2002. It noted that central governments in the Eurogroup had committed to ensure conversion of administered prices would be inflation neutral. It added however "the Governing Council calls on both governments at other levels and enterprises to follow the example set by central governments. Moreover it also calls upon the public's vigilance in monitoring prices and price changes, and encourages consumer and other organizations to actively engage in this task."
For a separate story on monetary developments in the euro area from the ECB monthly bulletin see link below.