IMF to Lower Eurozone Growth Projections

The International Monetary Fund will downgrade growth projections for the eurozone in July due to Brexit talks, political volatility in Italy and the prospect of a trade war with the United States.

While the eurozone’s economy outperformed expectations in 2017, the IMF expects a slowdown for the 19 economies, Christine Lagarde told a news conference in Luxembourg on Thursday, Neweurope reported.

The risk of trade war is seen as “first on the list” of risks; EU retaliatory tariffs begin on Friday and are expected to be scaled up in March 2019.

Lagarde said that Europe’s current trajectory points towards an “abrupt Brexit” and Italy may abandon the disciplined fiscal policy prescribed by the European Commission and go from a surplus to a deficit. This could trigger a negative reaction in financial markets, Lagarde warned.

In signaling out Italy, Lagarde was pointing to the government’s plans for fiscal expansion, having announced a minimum income policy and the introduction of earlier retirement age. All eyes are on the government’s 2019 budget, which could signal a resurgence of Italy’s cost of borrowing.

The warning comes after investors started putting pressure on Italy’s debt again after two vocal euro-skeptics were elected to key posts in the nation’s parliament. Claudio Borghi, the new head of the budget committee in the lower chamber, said in an interview with Corriere della Sera on Friday that leaving the euro would solve many of Italy’s problems but there’s no majority for it among lawmakers.

The yield on Italy’s 10-year bond fell six basis points to 2.67% on Friday after rising 18 basis points, the most in two weeks, on Thursday after the appointments. The benchmark FTSE MIB stock index gained 1%, rebounding from a 2% slide Thursday. Lagarde said an IMF team will visit Italy in two weeks to deliver its assessment of the country’s economy.

“We’re looking forward to meeting the authorities, to understanding exactly what their plans are for the moment,” she said. “We’re hearing some reassuring statements about fiscal discipline, declining debt trends.”

The combination of the ECB unwinding quantitative easing and Italy abandoning a policy of sustained budget surplus could put pressure on the second most indebted country in the eurozone.

“We will probably update and revise our growth forecasts for the eurozone modestly,” said Lagarde, noting that the effect of the slowdown will be shorter due to European Central Bank policy.