ECB survey sees lower euro zone growth ahead on Brexit

Euro zone growth may be lower than previously expected, primarily due to the effects of Britain’s vote to leave the European Union, the European Central Bank’s Survey of Professional Forecasters showed on Friday.

Growth is now seen at 1.4 per cent next year, below an earlier projection of 1.6 per cent while the 2018 estimate was cut to 1.6 per cent from 1.7 per cent, the quarterly survey of 51 forecasters showed. For 2016, the GDP growth projection was unchanged at 1.5 per cent.

“Based on the qualitative comments provided by the respondents, these revisions largely reflect an expected negative impact on the euro area from the UK referendum result,” the ECB, the central bank of the euro zone, said.

The ECB kept interest rates unchanged on Thursday but left the door open to further easing, arguing that it needed more data on the slowdown and the economic impact of the referendum.

Those forecasters that already included Brexit in their projection predicted that the fallout would reduce 2017 growth by 0.26 percentage point and inflation by 0.07 percentage point, the ECB said.

The growth impact will be felt through lower net exports to Britain, further limited by the depreciation of the pound, uncertainty about the nature of Britain’s future relationship with the EU, and increased volatility on financial markets, the ECB said.

The impact of Brexit on inflation will be small, however, the survey showed.

The ECB aims for inflation of close to 2 per cent but has undershot the target for years, a risk to its credibility, particularly since it is on track to miss at least through 2018, according to its own staff projections.

The survey of professional forecasters sees inflation at 1.2 per cent next year, 1.5 per cent in 2018 and 1.8 per cent in five years.

Reuters