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Trump, Brexit pose risk to outlook of Euro-area economy, EU says

Monday, February 13, 2017 - 19:16

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The election of Donald Trump in the US and the UK's decision to leave the European Union are heightening economic risk in the euro area, the European Commission said, as it predicted growth would slow this year.

[BRUSSELS] The election of Donald Trump in the US and the UK's decision to leave the European Union are heightening economic risk in the euro area, the European Commission said, as it predicted growth would slow this year.

In its first set of economic forecasts compiled since Mr Trump's victory and with the British government gearing up to officially trigger Brexit, the Brussels-based commission said on Monday that the euro area's economic recovery is "assailed by risks". The 19-nation region will grow by 1.6 per cent of gross domestic product this year, slower than the 1.7 per cent expansion last year.

"Large uncertainties characterise the economic outlook globally and in the euro area," Marco Buti, the head of the Commission's economic and financial affairs department, said in a statement.

"The path for the UK's exit from the union and its future status are still unclear" while "the concrete shape of the economic policies of the new US administration has still to emerge."

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The EU is bracing for troubled times ahead with a new US president that has taken a more protectionist trade stance and with the next two years set to be dominated by negotiations with the UK on its withdrawal from the bloc.

European governments are also struggling to shake off the effects of its debt crisis nearly seven years since Greece's first bailout, work out its response to an aggressive Vladimir Putin to its east and south, and come up with solutions to the flow of migrants from the war-ravaged Middle East.

"With uncertainty at such high levels, it's more important than ever that we use all policy tools to support growth," European Economics Commissioner Pierre Moscovici, said in a statement.

"The European economy has proven resilient to the numerous shocks it has experienced over the past year."

The growth outlook for Germany, France, Italy and Spain - the euro zone's four largest economies, - is mixed. The commission upgraded its forecast only for Germany. Yet, with an increase in GDP of 1.6 per cent, that's still less than the 1.9 per cent growth rate it witnessed in 2016, the commission said.

France's economy will grow by 1.4 per cent, an increase of 0.2 percentage points on 2016. Italy's 2017 rate of 0.9 per cent is identical to that of last year. Spain will grow by 2.3 per cent - less than the 3.2 per cent by which it expanded in 2016, according to Monday's forecast.

"The balance of risks remains on the downside although both upside and downside risks have increased," the commission said.

While in the short term, fiscal stimulus in the US could have a stronger impact on growth than currently expected, the commission said, "in the medium term, risks to the growth outlook stem from legacies of the recent crises; the UK's vote to leave the European Union; potential disruptions to trade; faster monetary tightening in the US, which could have a negative influence on emerging market economies; and the potential consequences of high and rising debt in China."

The euro-area inflation rate will average 1.7 per cent in 2017, 0.3 points higher than in its last forecast in November, but still below the European Central Bank's goal of just below two per cent, the commission said.

Stripping out volatile energy and food prices, inflation will "rise only gradually," the commission said, echoing remarks made last week by ECB President Mario Draghi.

The ECB's current stimulus settings reflect a recovering economy that isn't yet strong enough to stand on its own, Mr Draghi said.

Even as the inflation rate quickens, the ECB also stated that current gains are largely driven by energy prices and therefore don't warrant a discussion about tightening monetary policy yet.

The ECB will trim its bond-buying program to 60 billion euros (S$90.787 billion) per month in April from 80 billion euros a month currently, and it intends at this stage to let it run at that pace until the end of the year.

"The impact of positive base effects in energy inflation is "set to fade," the commission said.

"The slight increase in wages expected this year and next, as well as the narrowing and closure of the output gap, should begin supporting a moderate and gradual pick up in underlying price pressures."

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