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Eurozone set for post-Brexit economic slowdown, says IMF

Published 08/07/2016

The IMF says the UK's decision to leave the European Union will cause eurozone growth to slow down
The IMF says the UK's decision to leave the European Union will cause eurozone growth to slow down

The eurozone is on course for an economic slowdown in the wake of Britain's decision to leave the European Union, according to the International Monetary Fund.

The IMF has slashed its growth forecasts for the single currency bloc amid rising uncertainty, increased market volatility and falling exports to Britain.

It now expects the eurozone gross domestic product (GDP) to grow by 1.6% this year and 1.4% in 2017, downgrading its outlook from forecasts before the EU referendum vote of a 1.7% rise for this year and next.

The update comes after the eurozone economy expanded by 1.7% last year, its fastest pace since 2010.

The Washington-based fund said: "The markdowns for the euro area reflect likely weaker investor confidence on account of heightened uncertainty, greater financial market volatility, and lower import demand from the UK.

"Given the euro area's substantial weight in world trade, this slowdown would have spillovers to many other economies, including emerging markets, but the impact is expected to be limited."

It added: "Looking ahead, the risks to the outlook remain firmly on the downside and are mainly political. Uncertainty will persist as long as the UK's new status vis-a-vis the EU is not clear."

The IMF also downgraded its inflation forecasts to 0.2% for this year, before climbing to 1.1% in 2017 and 1.2% in 2018.

It previously predicted inflation to reach 0.3% in 2016, followed by rises of 1.2% and 1.4% over the period.

Meanwhile, it said that a potential "refugee surge, or a heightening of security concerns" could also hamper economic growth across the bloc.

It added: "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."

Economists have warned that the UK economy could be on course for a sharp contraction in the wake of the Brexit vote, with almost all now forecasting a recession.

On Thursday, the National Institute of Economic and Social Research (NIESR) said the British economy experienced "intensifying contraction" in June, and growth over the next few months is forecast to rapidly deteriorate following the Brexit vote.

Mahmood Pradhan, the deputy director of the IMF's European department, said the fund's economic growth forecasts for the eurozone were its "very early thinking and assessment".

The fund based its predictions on the expectation that Britain would negotiate a Brexit deal which would allow it continued access to the single market.

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