China and Brexit pose risks to global growth, warns ECB

Global growth is likely to accelerate next year but the outlook is fraught with risks, particularly from big emerging market economies including China, and Britain’s decision to leave the EU, the European Central Bank (ECB) said yesterday.

Global growth will motor along but the recovery will be gradual and uneven with heightened uncertainty, even as the US, the world’s biggest economy, is expected to recover, the ECB said in a regular economic bulletin.

“A key downside risk is a stronger slowdown in emerging markets, including China,” it said.

“A tightening of financing conditions and an increase in political uncertainty could exacerbate existing macroeconomic imbalances, denting confidence and resulting in an unexpectedly strong slowdown,” it said.

The bulletin was largely consistent with the outlook presented at the ECB’s September rate meeting.

“Policy uncertainty surrounding the economic transition in China could lead to an increase in global financial volatility,” the ECB said.

“Continued emphasis on rebalancing the economy — including reductions in overcapacity in some heavy industries and action to address non-performing loans — is expected to result in a decline in the pace of economic growth,” it said.

Although Brexit has so far had limited impact and some analysts have lifted their gloomy forecasts, the ECB warned that the worst may not be over.

“The economic implications of the UK leaving the EU could be worse than expected, increasing uncertainty and negatively affecting trade, business confidence and investment,” it said.

Although monetary and fiscal accommodation should support the British economy, the institutional and political uncertainty surrounding the negotiations are expected to dampen domestic demand, particularly investment, even if the short-term impact has been modest, the bank said.

Meanwhile, the ECB has also lowered the cap on emergency liquidity assistance. Greek banks draw from the country’s domestic central bank by €900m to €51.9bn, the Bank of Greece said yesterday.

The move reflected improving liquidity conditions in Greek banks and the stabilisation of private sector deposit flows, it said. The liquidity ceiling is valid up to October 4.

Greek banks have relied on emergency liquidity since February 2015 after being cut off from the ECB’s funding window.

Emergency funding is more costly than borrowing directly from the ECB. In June the ECB reinstated Greek banks’ access to its cheap funding operations, allowing lenders to reduce their dependence on the emergency liquidity lifeline. 

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