IMF slightly ups eurozone growth forecast

The International Monetary Fund on Tuesday warned that the eurozone economic outlook was clouded by Brexit and election uncertainties, with growth expected to be only modest overall.

In its latest World Economic Outlook report, the IMF said growth this year in the 19-nation eurozone would be 1.7 percent, up 0.1 percentage point from its January estimate but unchanged from the 2016 performance.

For 2018, the IMF said eurozone growth will slow slightly to 1.6 percent, in line with its previous forecast.

“The euro area recovery is expected to proceed at a broadly similar pace in 2017-18 as in 2016,” it said.

“The modest recovery is projected to be supported by a mildly expansionary fiscal stance, accommodative financial conditions, a weaker euro, and beneficial spillovers from a likely US fiscal stimulus,” it said.

Political uncertainty across Europe

However, “political uncertainty as elections approach in several countries, coupled with uncertainty about the European Union’s future relationship with the United Kingdom, is expected to weigh on activity.”

British Prime Minister Theresa May announced earlier Tuesday she would call snap elections on June 8 to clear the decks for Brexit as her Conservative Party rides high in the opinion polls.

May formally triggered the two-year Brexit divorce process on March 29, with both sides promising to do their best to reach a fair settlement.

But she has made clear repeatedly that she would walk away rather than accept a bad deal and the negotiations are expected to be difficult and politically challenging.

Meanwhile, France holds presidential polls shortly, with far-right and anti-EU candidate Marine Le Pen among the front-runners.

Germany, Europe’s biggest economy and the EU’s paymaster, goes to the polls in September.

France further expanding

The IMF sees the German economy slowing from a gain of 1.8 percent last year to 1.6 percent this year which represents an increase of 0.1 percentage points on its January forecast.

For 2018, Germany will slip further to 1.5 percent, unchanged compared with the January estimate, it said in the report.

In contrast, second-ranked France, which has struggled to get its economy going, will rise to 1.4 percent this year — also up 0.1 of a point compared with January — from 1.2 percent in 2016.

France should expand further next year, to 1.6 percent.

In contrast, Italy will continue bumping along — at 0.8 percent in both 2017 and 2018 after 0.9 percent last year, while Spain growth would slump — from 3.2 percent in 2016 to 2.6 percent and then 2.1 percent this year and next.

In addition to Brexit and election uncertainties, the IMF said there were concerns over the underlying fundamentals of the eurozone.

“The medium-term outlook for the euro area as a whole remains dim, as projected potential growth is held back by weak productivity, adverse demographics, and, in some countries, unresolved legacy problems of public and private debt overhang, with a high level of non-performing loans,” it said in the report.

Accommodative stance by ECB needed

The IMF recommended that with inflation low and many economies still operating well short of full capacity, the European Central Bank “should maintain its current accommodative stance. Additional easing may be needed if core inflation fails to pick up.”

The eurozone estimates compare with the IMF’s forecasts for faster global growth of 3.5 percent and 3.6 percent, after 3.1 percent in 2016.

It put Britain on 2.0 percent this year, revised up sharply as the economy appears to have weathered the Brexit shock so far but falling away to 1.5 percent in 2018. Growth was 1.8 percent in 2016.

The full 28-member EU should expand 2.0 percent and 1.8 percent this year and next, compared with 2.0 percent in 2016.