The IMF on Friday cut its eurozone growth outlook for the next two years over uncertainties sparked by Britain’s vote to leave the EU, and warned that the conditions could worsen if confusion continues to reign in financial markets.
In its annual policy review of the 19-country eurozone, the IMF said it now expects growth this year of 1.6 percent, down from the previous forecast of 1.7 percent, while next year’s growth forecast will drop to 1.4 percent from 1.7 percent previously.
The IMF said a further global growth slowdown could derail the eurozone’s domestic demand-led recovery, and further Brexit spillovers, the refugee surge, increased security concerns and banking weakness all could take their toll on growth.
However, IMF European department deputy director Mahmood Pradhan said that if the separation negotiations drag out between the EU and the UK and continue to cause risk reductions in financial markets, eurozone growth would slow further.
“If that risk aversion is prolonged, we think the growth impact could be larger and at this point, it is very difficult to tell how long that period lasts,” Pradhan told reporters during a conference call.
The 1.4 percent growth scenario for next year assumes a relatively swift negotiation of a deal that would preserve full tariff-free access to the EU common market for Britain, he said, adding that even this “best-case” scenario would cause a slowdown in investment and weigh on consumer and market confidence.
The IMF has not fully calculated the drag on growth that would result from a full arm’s-length relationship that would revert Britain’s EU status to basic WTO tariff and access rules.
Pradhan said that would be a “significant change” for Britain, which sends about 40 percent of its exports to the EU.
“If you went to the WTO option, just getting there would take a very long time — and that itself will be very damaging,” Pradhan said.
The report said medium-term prospects for the eurozone are “mediocre,” constrained by crisis legacy problems from high unemployment, elevated public and private debt and deep-rooted structural weakness.
“As a result, growth five years ahead is expected to be about 1.5 percent, with headline inflation reaching only 1.7 percent,” the IMF said.
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