IMF raises eurozone growth forecast despite Brexit

[BRUSSELS] The IMF raised its growth forecast for the eurozone on Tuesday, but warned of uncertainty due to the still unknown consequences of Brexit and damage caused by low inflation.

The IMF edged up the growth forecast for the 19 nation currency bloc to 1.7 per cent in 2016, from an earlier 1.6 per cent, citing low oil prices and economic stimulus policies at the European Central Bank.

"Low oil prices, a modest fiscal expansion in 2016, and easy monetary policy will support growth, while weaker investor confidence on account of uncertainty following the Brexit vote will weigh on activity," the IMF said in a statement.

It also edged up the forecast for growth next year to 1.5 per cent, from the earlier 1.4 per cent, a slowdown as the effects of the UK's vote to leave the EU will deepen over time.

The IMF warned that super low inflation will remain a reality in Europe for at least the next five years in a warning that the waves of unprecedented stimulus by the ECB will fail to substantially boost prices.

In advanced economies, including the eurozone, "the risk of persistent low inflation (or deflation, in some cases) has risen," the IMF said.

The fund said any boost in consumer prices "is projected to remain gradual going forward, with inflation remaining below the European Central Bank's target (of near two per cent) through 2021," it said.

Alarmingly, a recovery in domestic demand that would boost prices "decelerated in some of the larger euro area economies after successive quarters of stronger-than-expected growth," the IMF said.

"The European Central Bank should maintain its current appropriately accommodative stance," the IMF said, with still additional stimulus needed if inflation fails to pick up.

In eurozone countries more severely affected by the crisis - such as Greece, Portugal and Spain - growth and investment "remain in 2016 well below their precrisis levels," it said.

In addition, trouble at banks in the eurozone, weighed down by bad loans, "has potentially held back lending and suppressed investment" across the bloc, the IMF said.

Brexit was also a major, while so far unclear, concern.

"Most dramatically, the unexpected vote for Brexit... brings political and economic uncertainties that threaten to dampen investment and hiring throughout Europe," the IMF said.

AFP