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IMF Warns That Brexit Will Affect Eurozone Growth

The International Monetary Fund is the latest institution to lower its forecast of the European Union’s economic growth following the UK’s decision to leave the union.

IMF Warns That Brexit Will Affect Eurozone Growth

Prior to the referendum, the IMF had forecast that the EU’s economic growth would hover around 1.7% in 2016 and 2017. However, following Britain’s vote to exit the EU, growth predictions have been cut down to 1.6% for 2016 and 1.4% for 2017. 

The IMF further lowered its economic growth predictions for 2018 from 1.7% down to 1.6%.

According to statements by the Fund, economic growth prospects in the Eurozone for the medium term are expected to be mediocre at best, a situation that is compounded by high debt and unemployment.

Deputy Director of the Fund’s European Department, Mahmood Pradhan asserted that the situation could worsen if the negotiations between the UK and the rest of the Union perpetuated a situation where investors continue to panic and avoid riskier assets as has been witnessed in the financial markets recently.

In a conference call he said, “If the trend of risk aversion is extended any longer, the impact on growth could be large. At this point it is difficult to know how long that period would last.”

He added that the 2017 revised projection was the best-case scenario according to the IMF. Such predictions were largely based on the anticipation that a deal would be struck that would enable the UK to access the Eurozone single market.

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Major disruptions

In the event that the UK chose to cut off all ties with the Eurozone and chose instead to work with World Trade Organization regulations, Mr. Pradhan said such a move would result in major disruptions.

He added that it was still early to express confidence over the eventual situation in terms of the relationship the UK would have with the EU.

The IMF asserted, though, that in the medium term, issues such as Eurozone’s structural weakness and high unemployment would still dampen growth prospects in the region.

A five-year projection shows that growth could hover around 1.5% with inflation expected to be at just 1.7%.

Given that the Eurozone was a significant player in world trade, any slowdown in that region could have adverse implications for the rest of the global economy.

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