Up to half percentage point expected to be lost the Eurozone next year
by Emanuele Bonini
Brexit poses downside risks for European economic growth, said the European Commission in a report published today. The directorate-general for Economic and financial affairs made available the Economic outlook after the UK Referendum: a First assessment for the Euro area, document containing first consideration on potential effect of the British referendum. There is no doubt that the UK’s vote will affect not only the UK but also the rest of the EU economy «through several transmission channels», mainly uncertainty, investment, trade and migration. In the near term, the main impact will be a large increase in uncertainty, both economic and political. These factors are expected to slow private consumption and investment growth and to impact on foreign trade, mainly in the UK, but also in the other EU Member States. Simulations from the European Commission services suggest a moderate growth in 2016 (to 1.5%-1.6%) and in 2017 (to 1.3%-1.5%), meaning a cumulated loss of GDP in the range of ¼ to ½ a percentage point in the Euro area by next year and 1 to 2¾ percentage points in the UK. Figures changed compared to previous estimation. Before the UK referendum, GDP growth in the Euro area would have been expected to reach 1.7% in both 2016 and 2017.
This is just a partial preliminary analysis. The situation is so unclear to make a definitive answer impossible, right now. As specified by the report, due to the lack of information about the new equilibrium after the UK’s exit, many elements have not yet entered the assessment but nevertheless constitute substantial risks to the outlook. The point is there are no information about the situation after the UK’s exit, such as trade patterns, mobility of goods, services and labour, policy responses. All these missing elements make impossible to specify what can happen. However it is possible to state the Euro area and the EU are already under pressure, as pointed out in the assessment of the European Commission. The banking sector, particularly in Italy, has come under significant pressure recently as the UK referendum result exacerbated pre-existing vulnerabilities and led markets to question the capacity of these banks to repair their balance sheets. This is especially true considering that «the weaker growth outlook makes it harder for many banks to improve their balance sheets by increasing capital and/or reducing non-performing loans».
Brexit poses downside risks for European economic growth, said the European Commission in a report published today. The directorate-general for Economic and financial affairs made available the Economic outlook after the UK Referendum: a First assessment for the Euro area, document containing first consideration on potential effect of the British referendum. There is no doubt that the UK’s vote will affect not only the UK but also the rest of the EU economy «through several transmission channels», mainly uncertainty, investment, trade and migration. In the near term, the main impact will be a large increase in uncertainty, both economic and political. These factors are expected to slow private consumption and investment growth and to impact on foreign trade, mainly in the UK, but also in the other EU Member States. Simulations from the European Commission services suggest a moderate growth in 2016 (to 1.5%-1.6%) and in 2017 (to 1.3%-1.5%), meaning a cumulated loss of GDP in the range of ¼ to ½ a percentage point in the Euro area by next year and 1 to 2¾ percentage points in the UK. Figures changed compared to previous estimation. Before the UK referendum, GDP growth in the Euro area would have been expected to reach 1.7% in both 2016 and 2017.
This is just a partial preliminary analysis. The situation is so unclear to make a definitive answer impossible, right now. As specified by the report, due to the lack of information about the new equilibrium after the UK’s exit, many elements have not yet entered the assessment but nevertheless constitute substantial risks to the outlook. The point is there are no information about the situation after the UK’s exit, such as trade patterns, mobility of goods, services and labour, policy responses. All these missing elements make impossible to specify what can happen. However it is possible to state the Euro area and the EU are already under pressure, as pointed out in the assessment of the European Commission. The banking sector, particularly in Italy, has come under significant pressure recently as the UK referendum result exacerbated pre-existing vulnerabilities and led markets to question the capacity of these banks to repair their balance sheets. This is especially true considering that «the weaker growth outlook makes it harder for many banks to improve their balance sheets by increasing capital and/or reducing non-performing loans».
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