World Economy

IMF Cuts Eurozone Growth

IMF Cuts Eurozone Growth IMF Cuts Eurozone Growth

The International Monetary Fund on Friday announced its cut on eurozone growth outlook for the next two years over uncertainties sparked by Britain's exit from the European Union.

Stating that the conditions could worsen if confusion continues to reign in financial markets, the IMF in its annual policy review of the 19-country euro currency bloc said it expects the 2016 growth at 1.6%, down from the previous forecast of 1.7%, the ANI reported.

In its annual policy review of the 19-country bloc, 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.

"If the 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," said IMF European Department Deputy Director Mahmood Pradhan.

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 World Trade Organization tariff and access rules.

Pradhan added the change will be significant for Britain as it sends some 40% of its exports to the EU. As a result, the growth five years ahead is expected to be about 1.5%.

“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 recommendation in the staff report that collective actions should be taken to improve the governance of the economic union and make it more cohesive remains valid, and has now taken on greater urgency”.

The UK’s vote to leave the EU heaps fresh pressure on the eurozone project less than a year after debt-ridden Greece came close to tumbling out of the currency union. Grexit was narrowly avoided but the IMF warns prolonged low growth and inflation have left the eurozone increasingly vulnerable to shocks. The bloc will also remain prone to recurrent crises of confidence unless political leaders pull together, it said.

Earlier on Friday, a leading credit ratings agency also warned of political shockwaves from Brexit. Moody’s said the UK’s vote could even topple the whole EU project. “In the long run, the potential strengthening of nationalistic and protectionist movements could have a detrimental effect on the EU, even threatening its existence,” it said, in an update to financial markets.