Eurozone cuts 2017 growth outlook after Brexit

The European Union is warning that the eurozone economy faces new challenges due to Brexit and increased volatility. (Photo: AFP/Daniel Roland)

Brussels also nearly halved its economic growth outlook for Britain itself next year due to uncertainty over the country's vote to leave the bloc.

Pointing to increased global risks for the 19-country single currency area as shown by the shock victory of Donald Trump in the United States, the European Commission said economic growth this year would reach a modest 1.7 per cent. The commission also said that eurozone growth would slow to 1.5 per cent growth next year, as the negative effects of Britain's looming divorce from the EU began to be felt more deeply.

"In these volatile and uncertain times, no effort must be spared to safeguard and strengthen this recovery - and ensure that all sections of society feel its benefits," said EU Economics Affairs Commissioner Pierre Moscovici.

Asked about the impact of the Trump vote in the US, Moscovici stressed the need to boost economic recovery. "The frustration expressed in the US clearly echoes that of European voters," Moscovivi said. "Many of our citizens feel excluded from the economic recovery and many of them feel disconnected from government."

Inflation, long stuck near negative territory, would accelerate sharply, the commission said, as rising oil prices began to lift consumer prices.

The commission said inflation in the eurozone would hit 1.4 per cent in 2017, up from an expected 0.3 per cent for 2016. This will come as a relief to the European Central Bank which has embarked on a controversial stimulus programme to get inflation nearer to the official target of close to 2.0 per cent.

Growth in all 28 EU nations would hit 1.8 per cent in 2016, the commission said, with a drop to 1.6 per cent next year.

The EU nearly halved its economic growth outlook for Britain in 2017 due to the impact of the Brexit vote to leave the bloc. It is set to edge up again to 1.2 per cent in 2018. Growth in the UK was projected to fall to 1.0 per cent from 1.9 per cent in 2016 "reflecting the impact of heightened uncertainty following the referendum", the commission said.

Britain voted to leave the EU in a referendum on Jun 23, with the government expected to trigger two years of divorce negotiations in March of next year. The "UK 'leave' vote ... has raised uncertainty and can be seen as an indicator of heightened policy risks in the current volatile political environment," the commission forecast said.

Greece will be the only eurozone member in recession this year, with a contraction of 0.3 per cent as fallout from debt crisis continued to affect the economy. But the economy would turn around sharply to 2.7 per cent expansion next year, the commission said.

Growth in Ireland and Malta would lead the single currency zone with a 4.1 per cent expansion this year. The Commission forecasts also cleared the air for France, which will achieve enough growth this year to reduce its deficit to 2.9 per cent of GDP, just inside the EU's three per cent limit, according to the estimates.

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