Lowering its growth forecasts for the 19-country region the International Monetary Fund (IMF) says that the U.K.’s decision to leave the EU is expected to weigh on euro zone growth.
Despite the single currency zone seeing a strengthening recovery recently which had been helped by lower oil prices and an accommodative monetary policy, the U.K.’s vote to leave the European Union (EU) would hamper growth prospects in the region, the IMF said in its latest report on the euro area.
that the U.K.’s vote to leave the European Union (EU) would hamper growth prospects in the region, despite the single currency zone seeing a strengthening recovery recently which had been helped by lower oil prices and an accommodative monetary policy.
“Mainly due to the negative impact of the U.K. referendum outcome”, the IMF said that the Euro area gross domestic product (GDP) growth is expected to decelerate from 1.6 percent this year to 1.4 percent in 2017.
Marked below the European Central Bank’s medium-term price stability objective or around 2 percent, the inflation expectations also remain “very low”, the IMF warned. However, helped by gradually rising energy prices, it is expected that from 0.2 percent this year, the headline inflation will increase to 1.1 percent next year, the IMF said.
Laying out a litany of risks both within Europe and beyond, it said that still, “downside risks have grown.”
“Externally, a further global slowdown could spill over and derail the domestic demand-led recovery. Domestically, the risks are largely political,” the IMF noted.
“Further spillovers from the U.K. post referendum situation, the refugee surge, or a heightening of security concerns could contribute to greater uncertainty, hurting growth and hindering progress on policies and reforms. Other risks include banking and financial sector weaknesses in some countries. Moreover, prolonged low growth and inflation themselves make the euro area increasingly vulnerable to shocks. Policy buffers to counter these risks are low,” the IMF said.
“With crisis legacies of high unemployment, elevated public and private debt, and deep-rooted structural weaknesses weighing on the outlook and productivity growth”, the medium-term prospects for the euro zone were not much to cheer either, with the fund saying these were “mediocre”.
Hence the IMF says that with headline inflation reaching only 1.7 percent, growth five years ahead is expected to be about 1.5 percent.
“Comprehensive and more balanced policies taken collectively are needed to respond to these risks, helping to boost growth, rebuild buffers, and strengthen integration,” the fund said.
There was need to incentivize structural reforms to improve productivity and reduce macroeconomic imbalances, the fund said.
“Given limited fiscal space at the national level, an expansion of centralized fiscal support is needed, but should be accompanied by a stronger governance framework to ensure that members comply with the fiscal and structural rules. These measures would complement the current stance of monetary policy, providing a more balanced policy mix,” it noted.
(Adapted from Bloomberg)
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