The International Monetary Fund (IMF) will downgrade growth projections for the eurozone in July due to Brexit talks, political volatility in Italy and the prospect of a trade war with the United States.
While the eurozone’s economy outperformed expectations in 2017, the IMF expects a slowdown for the 19 economies, Christine Lagarde told a news conference in Luxembourg on Thursday.
The risk of trade war is seen as “first on the list” of risks; EU retaliatory tariffs begin on Friday and are expected to be scaled up in March 2019.
Lagarde said that Europe’s current trajectory points towards an “abrupt Brexit” and Italy may abandon the disciplined fiscal policy prescribed by the European Commission and go from a surplus to a deficit. This could trigger a negative reaction in financial markets, Lagarde warned.
In signalling out Italy, Lagarde was pointing to the government’s plans for fiscal expansion, having announced a minimum income policy and the introduction of earlier retirement age. All eyes are on the government’s 2019 budget, which could signal a resurgence of Italy’s cost of borrowing. However, concerns on this front continued to rise on Thursday as Interior Minister Matteo Salvini appointed two notorious eurosceptics at the helm of two key parliamentary committees, namely budget and financial affairs.
The combination of the ECB unwinding quantitative easing and Italy abandoning a policy of sustained budget surplus could put pressure on the second most indebted country in the Eurozone.
“We will probably update and revise our growth forecasts for the euro area modestly,” said Lagarde, noting that the effect of the slowdown will be shorter due to European Central Bank policy. Last week, the ECB announced it would unwind its bond-buying programme more gradually than markets expected, ending in December 2018.