IMF: Euro zone growth to slow amid Brexit fears

Protracted 'divorce' talks between the EU and Britain would further worsen situation

WASHINGTON • The uncertainties caused by Britain's vote to leave the European Union will cause euro zone economic growth to decelerate to 1.4 per cent in 2017 from 1.6 per cent this year, and downside risks are already piling up, the International Monetary Fund (IMF) said yesterday.

In its annual policy review of the 19-country bloc, the IMF said a further global growth slowdown could derail the euro area'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.

IMF European Department deputy director Mahmood Pradhan said that if the separation negotiations between Britain and the EU drag out and continue to cause risk reductions in financial markets, euro area 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," Mr Pradhan told reporters on a conference call.

He added that the 1.4 per cent growth scenario for 2017 assumes a relatively swift negotiation of a deal that would preserve full tariff-free access to the EU common market for Britain.

Even this "best-case" scenario will cause a slowdown in investment and weigh on consumer and market confidence, he said.

Reuters reported the IMF as saying medium-term prospects for the euro zone 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 per cent, with headline inflation reaching only 1.7 per cent," the fund said.

The report comes two days after IMF chief Christine Lagarde told Agence France-Presse in an interview that Brexit was unlikely to cause a world recession, adding that the immediate effects would hurt Britain, with some spillover to the euro area.

"There will be spillover effects on the euro area. But my optimistic approach of life tells me that Brexit could be a catalyst that could push the EU to deepen its economic integration," she added.

She also said that proposals in Britain to cut corporate tax rates to 15 per cent from 20 per cent to counter the damage caused by Brexit was a "race to the bottom" that would hurt other economies.

In a separate interview with The Financial Times on Thursday, Ms Lagarde said she doubted that a prolonged period of uncertainty over Britain's exit, without triggering formal separation negotiations, would be politically sustainable.

"We want to see clarity sooner rather than later because we think that a lack of clarity feeds uncertainty, which itself undermines investment appetites and decision making," she said.

A version of this article appeared in the print edition of The Straits Times on July 09, 2016, with the headline 'IMF: Euro zone growth to slow amid Brexit fears'. Print Edition | Subscribe