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.
However, IMF European department deputy director Mahmood Pradhan said if the separation negotiations drag out between the EU and the UK and continues to cause risk reductions in financial markets, eurozone growth would slow further.
“If that 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,” he said.
He added that the 1.4% growth scenario for 2017 assumes a relatively swift negotiation of a deal that would preserve full tariff-free access to the EU common market for Britain.
Even this “best-case” scenario will cause a slowdown in investment and weigh on consumer and market confidence, he said.
In the report, the IMF said medium-term prospects for the eurozone are “mediocre”, constrained by crisis legacy problems from high unemployment, elevated public, and private debt, and deep-rooted structural weakness.
“As a result growth five years ahead is expected to be about 1.5%, with headline inflation reaching only 1.7%,” the IMF said.
The statement coincided with fresh data yesterday showing that UK consumer confidence plunged the most in 21 years, last month — the latest sign that the Brexit vote is harming the nation’s outlook.
Market research firm Gfk’s core index slid to minus nine in a special post-referendum survey conducted from June 30 to July 5, from minus one earlier in June.
That’s the biggest slide since December 1994 when increases in tax, interest rates and job insecurity weighed on spending.
While confidence among respondents who said they voted to remain in the EU dropped to minus 13, the decline was tempered by a lesser slide of minus five among those who said they opted to leave.
Anxiety is growing as investors and households try to gauge the economic ramifications of the June 23 decision.
“During this period of uncertainty, we’ve seen a very significant drop in confidence,” said Joe Staton, head of market dynamics at GfK.
“Every one of our key measures has fallen, with the biggest decrease occurring in the outlook for the general economic situation in the next 12 months.”
Meanwhile, a third week of declines has made sterling this year’s worst performer among major currencies.
The pound’s rally yesterday barely dented its 2.7% slide versus the dollar in the preceding four days.
The UK currency this week overtook the Argentine peso as the biggest loser versus the dollar among 31 major peers in 2016 as investors continued to digest the Brexit vote fallout.
“Sterling’s going to fall considerably further as the effects of that uncertainty on investment and growth emerge from the gloom,” Kit Juckes of Societe Generale in London, said.