ECB Survey Sees Brexit Malaise Hurting Euro-Area Growth
Growth in the euro area is expected to slow in 2017 and 2018 due to the negative impact associated with Brexit, results of a European Central Bank Survey show.
Respondents to the ECB's third-quarter survey of professional forecasters revised their growth estimates downwards to 1.4% for 2017 and 1.6% in 2018 due to uncertainties caused by the U.K.'s vote to leave the EU on June 23.
This represents a decrease of 0.2 percentage point for 2017 and 0.1 percentage point for 2018.
Respondents kept their forecast for 2016 inflation unchanged at 0.3%, while trimming their predictions for the 2017 and 2018 rates by 0.1 percentage point from the April survey, to 1.2% and 1.5%, respectively.
The survey comes in the same week that the International Monetary Fund issued a stark warning about the impact of Brexit on global growth.
The fund said that the U.K.'s vote to leave the European Union last month will have a severe impact on economic growth, with economies in the U.K. and Europe hit the hardest. "Brexit has thrown a spanner in the works," said IMF chief economist Maurice Obstfeld.
The IMF said this will put the onus on policymakers to strengthen banking systems and carry out structural reforms.
The IMF said it now forecasts global growth be 3.1% in 2016 and 3.4% in 2017. Both estimates have been cut by 0.1 percentage point. Growth in the U.K. is expected to be 1.7% this year and 1.3% in 2014. That is a decrease of 0.2 percentage point and 0.9 percentage point, respectively, from April estimates.
Yesterday, ECB president Mario Draghi said growth in the euro area is supported by domestic demand as export growth "remained modest".
Although, growth is expected in the second quarter albeit at a slower pace, "the risks to the euro area growth outlook remain tilted to the downside," Draghi said.
He mentioned headwinds from the U.K. referendum and other geopolitical uncertainties as risks to economic recovery. There is also the prospect of lower growth in emerging markets and the "sluggish pace" of implementation of structural reform.
Like the Bank of England before, the ECB on Thursday did not change key bank rates, which now sit at 0%. Draghi said that there had not been enough data about the impact of the Brexit vote to make a decision on easing.
But he signaled the ECB will consider easing if the economy takes a turn. "Over the coming months, when we have more information, including new staff projections, we will be in a better position to reassess the underlying macroeconomic conditions, the most likely paths of inflation and growth, and the distribution of risks around those paths."
He said, "If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate."
Today's drop in July's U.K. manufacturing PMI reading pointed to a slowdown in British growth, which risks spilling over to the eurozone economy. Eurozone PMIs fell in July, but not as much as expected, Markit Economics data showed.
July's flash manufacturing PMI figures for the U.K. fell dramatically against the June figure and missed expectations. This was one of the first PMI readings to have responses taken after the U.K. voted to leave the European Union on June 23.
The July reading fell to 49.1 from 52.1 in July, a 41-month low. Economists were expecting a reading of 48.7.
The flash services PMI index was at 47.4, down from 52.3 in June, against a forecast of 48.8.
A reading of below 50 signals contraction.
The pound tumbled 1.09% against the dollar on the announcement to $1.3089.
Markets have been more resilient, with the FTSE 100 gaining 0.39% to 6,725.98 and the Cac 40 up 0.24% to 4,386.84 in Paris.
The Dax in Frankfurt was marginally down 0.01% at 10,155.34.