Eurozone faces triple threat, says IMF

The eurozone faces a triple threat that has the potential to push the economy deeper into a slump, warns the IMF.

Global trade tensions, a no-deal Brexit and the fiscal stance taken by countries such as Italy pose “significant risks” to hopes that conditions may pick up later this year, the IMF said in a report released yesterday.

Inflation levels continue to undershoot European Central Bank targets and growth has slowed, the Fund says, calling for greater structural reforms at the national level to enhance the region’s resilience.

“The central forecast is precarious, with three serious risks that could derail the upswing,” IMF economists say in the concluding statement of an ‘Article IV’ mission to take stock of the eurozone economy.

“First, prolonged global trade tensions could undermine external demand. Second, the risk of a no-deal Brexit remains high; while the financial sector has made progress in preparing for this eventuality, firms in other sectors – especially smaller firms – are less prepared.

“Third, high-debt countries’ failure to rebuild fiscal buffers and implement structural reforms leaves them more vulnerable to shifts in market sentiment and the next downturn.

“These risks could materialise synchronously. Even without a major shock, the euro area could experience a prolonged period of anaemic growth and inflation.”

In their comments, the Fund economists said euro-area growth decelerated sharply in the second half of 2018 due to a combination of slowing external demand and domestic factors.

While headline inflation has fluctuated with energy prices, core inflation has remained “troublingly low” despite declining unemployment and a gradual pick-up in wage growth.

Inflation expectations in the euro-area are at record low – indicating a slowdown and the potential for stimulus – piling pressure on the European Central Bank to take steps to support the region’s economy.

The IMF says growth should firm up over the course of this year if there is continued robust domestic demand on the back of a tight labour market, global recovery, and continued monetary accommodation.

But more active fiscal policies will be needed if growth deteriorates sharply and the euro area is tipped into a recession, potentially triggering the escape clause in the EU fiscal framework to allow countries to stimulate growth.

In a veiled criticism of “lenient enforcement” of rules by Brussels against countries such as Italy, the Fund says better compliance with and enforcement of eurozone fiscal rules is needed.