Eurostat reported euro-area inflation slowed to 1 percent in July from last year and down from June at 1.3 percent - Photo: Special

JAKARTA (TheInsiderStories) – The International Monetary Fund (IMF) cut its Eurozone growth forecasts 1.2 percent this year, down from an estimate of 1.3 percent in April, the fund said on Wednesday (11/06). That is a significant slowdown compared to last year’s 1.9 percent expansion.

Furthermore, the 19-country Eurozone economy would grow by 1.4 percent in 2020 and 2021, the IMF said, cutting its previous estimate of 1.5 percent growth in both years. Germany is now expected to grow by only 0.5 percent this year, slower than the 0.8 percent the IMF had predicted in April. That would be one-third of the 2018 growth.

“Economic activity in Europe has slowed on the back of weakness in trade and manufacturing. For most of the region, the slowdown remains externally driven,” the IMF said.

“However, some signs of softer domestic demand have started to appear, especially in investment. Services and domestic consumption have been buoyant so far, but their resilience is tightly linked to labor market conditions, which, despite some easing, remain robust,” its adds.

The IMF said Europe’s growth is projected to decline from 2.3 percent in 2018 to 1.4 percent this year – the lowest growth rate since 2013. A modest rebound to 1.8 percent is forecast for 2020 as global trade is expected to pick up.

“Amid high uncertainty, risks remain to the downside, with a no-deal Brexit the key risk in the near term, which could have a sizeable negative impact on the economies in the region,” the IMF said.

An intensification of trade tensions and related uncertainty could also dampen investment, the fund said. More broadly, the weakness in trade and manufacturing could spread to other sectors – notably services – faster and to a greater extent than currently envisaged.

“Other risks stem from abrupt declines in risk appetite, financial vulnerabilities, the re-emergence of deflationary pressures in advanced economies, and geopolitics,” it said.

To counter the slowdown, the fund reiterated its call for a “synchronized fiscal response” by Eurozone governments, in a clear message to Berlin to invest more. Given elevated downside risks, contingency plans should be at the ready for implementation in case these risks materialize, not least because the scope for effective monetary policy action has diminished. A synchronized fiscal response, albeit appropriately differentiated across countries, could become suitable.

“Reinvigorating structural reforms, including by raising labor force participation, enhancing human capital and infrastructure, and strengthening governance, remains vital to raise economic growth and address long-term challenges, such as adverse demographic trends,” it said.

It said the slowdown, so far mostly caused by the impact of global trade tensions on the bloc’s export-driven industry, could spill over to services, the largest economic sector in the Eurozone. Britain’s process to leave the European Union (EU) was also a cause of concern, with a no-deal Brexit causing vast negative effects on both Britain and the EU.

In the event of an orderly Brexit, which could occur by the end of January, the IMF confirmed its earlier estimates that Britain’s economy would grow by 1.2 percent this year and 1.4 percent next. Growth was 1.4 percent in 2018. Inflation in the bloc is expected by the IMF to be 1.2 percent this year, 1.4 percent next and 1.5 percent in 2021, short of the European Central Bank’s target of a rate close but below 2 percent.

“Given that unemployment rates are projected to remain close to or below levels reached during the pre-crisis boom, countries’ fiscal stances should generally remain guided by medium-term objectives,” the IMF said.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com