Uncertainty resulting from the UK’s vote to leave the EU was the main factor affecting the economic outlook in the bloc, the European Commission said on July 19, in its first economic outlook report published after last month’s Brexit referendum.
Euro zone growth could slow down to 1.5-1.6 per cent this year and 1.3-1.5 per cent in 2017, compared to the Commission’s earlier forecast of 1.7 per cent in 2016 and 2017, according to the report.
The outcome of the referendum has caused volatility on the financial markets and abrupt swings in exchange rates – these developments, coupled with the uncertainty resulting from what is expected to be a protracted period of Britain’s exit negotiations, could damage the economic recovery in the EU, the Commission said.
“Without information about the situation after the UK’s exit (e.g. trade patterns, mobility of goods, services and labour, policy responses), the ‘new equilibrium’ is difficult to pencil in and thus the adjustment path is impossible to specify,” the Commission’s report said.
The Commission’s assessment envisions two separate scenarios in the aftermath of the Brexit vote – in the ‘mild’ scenario, moderate uncertainty would have a dampening impact on growth for a limited time period, while the more ‘severe’ scenario incorporates a “prolonged and more severe uncertainty shock, which increases the risk premium and thus financing costs, and induces precautionary savings by households.”
EC’s spring growth forecast already had substantial risks, but the British referendum created a “multitude of new, mostly downside risks”, the Commission said. The vote has increased or even created political risks which, if they were to materialise, could alter the forecast massively, but such risks were extremely difficult to quantify as they could affect a large number of variables, according to the report.