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ECB warns of possible further eurozone slowdown, flags protectionism risks

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ECB warns of possible further eurozone slowdown, flags protectionism risks

European Central Bank policymakers cited the need to maintain "a steady hand" as they agreed that eurozone growth could further slow down and uncertainty surrounding the economic outlook was on the rise, according to minutes of their April meeting.

Policymakers said underlying growth momentum in the euro area remained intact and broad-based, but recent economic data pointed to some moderation in the pace of expansion. And while overall risks to growth continued to be "broadly balanced," those related to issues such as protectionism had "become more prominent."

"[I]t was widely felt that uncertainty surrounding the outlook had increased and caution was seen as warranted in interpreting recent developments, also because the moderation in growth appeared to be broad-based across countries and sectors," the ECB said in the minutes published May 24.

"A more pronounced weakening of demand, notably related to external factors, could therefore not be ruled out," the central bank added.

The ECB said the slower growth may be partly due to "temporary factors" and supply constraints in certain sectors in some countries, as concerns about protectionism may have also dampened business sentiment and expectations.

Despite the moderation, growth was still solid and the ECB's confidence in the strength of the eurozone economy remained unchanged, the bank said.

The ECB expects annual headline inflation to hover around 1.5% for the rest of 2018, below its target of just under 2%.

Caution on government debt

In addition to protectionism, the ECB also flagged increased government spending, warning the more heavily indebted eurozone countries against loosening their purse strings.

"There was broad agreement among members that it was warranted to reinforce calls for existing fiscal rules to be respected and for fiscal buffers to be rebuilt, in particular with regard to those Member States with high government debt," the ECB said in the minutes.

The bank issued a similar warning in its latest Financial Stability Review, which was released hours ahead of the policy meeting minutes: "A deteriorating growth environment or a loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment towards some euro area sovereign issuers."

The warning comes ahead of the formation of a new Italian government made up of a populist coalition that pledged a spending spree and tax cuts in defiance of EU fiscal rules.