Euro zone economic growth is set to slow more than expected as the bloc’s manufacturing crisis could spill over to the larger services sector under protracted global trade tensions, the International Monetary Fund said on Wednesday.
The IMF said the 19-country euro zone would grow by 1.2 per cent this year, revising down its earlier estimates from April of 1.3 per cent growth for the bloc. That is a significant slowdown compared to last year’s 1.9 per cent expansion.
The bloc’s economy would grow by 1.4 per cent in 2020 and 2021, the IMF said, cutting its previous estimate of 1.5 per cent growth in both years.
The slowdown is mostly due to anaemic growth in Germany, the euro zone’s largest economy, and stagnation in Italy, the third-biggest, the fund said, revising down its earlier forecasts for both countries.
Germany is now expected to grow by only 0.5 per cent this year, slower than the 0.8 per cent the IMF had predicted in April. That would be one-third of 2018 growth.
The IMF also cut its growth forecast for France, the bloc’s second-largest economy, despite better-than-expected output estimates for the third quarter released last week. The country is now expected to grow by 1.2 per cent this year, instead of the 1.3 per cent previously forecast.
To counter the slowdown, the fund reiterated its call for a ‘synchronised fiscal response’ by euro zone governments, in a clear message to Berlin to invest more.
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 euro zone.
Britain’s process to leave the European Union 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 per cent this year and 1.4 per cent next. Growth was 1.4 per cent in 2018.
Inflation in the bloc is expected by the IMF to be 1.2 per cent this year, 1.4 per cent next and 1.5 per cent in 2021, short of the European Central Bank’s target of a rate close but below 2 per cent.
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