IMF to revise down euro zone growth, sees Brexit, Italy risks

By Francesco Guarascio and Jan Strupczewski

LUXEMBOURG (Reuters) – The International Monetary Fund is likely to revise down its growth forecasts for the euro zone as the area faces higher risks from trade, Britain’s talks to leave the bloc and market jitters over fiscal easing in Italy and other states.

When the fund publishes its new forecasts on the global economy in July, it is likely to slightly revise down its growth estimates for the 19-country euro zone but does not expect “a sharp slowdown,” the fund’s managing director Christine Lagarde told a news conference in Luxembourg on Thursday.

“We will probably update and revise our growth forecasts for the euro area modestly, but we will revise it down a little bit,” she said, adding that the expected slowdown was partly softened by the monetary policy of the European Central Bank.

She said the main reasons for the likely revision were the risks of a global trade war, inconclusive Brexit talks and markets’ abrupt reactions to Italy and other countries’ plan to increase public expenditure without proportionate revenues.

She said “trade tensions initiated by tariff increase on steel and aluminum” by the United States were the first reason for concern, especially in case of future escalation.

This risk for the euro zone’s economy was compounded by U.S. sanctions on Iran and higher sanctions on Russia, she said.

Brexit is the second major risk that the euro zone’s economy faces, Lagarde said, citing the lack of progress on the divorce talks and Britain’s unclear position as a possible cause for an “abrupt Brexit.”

The third major risk for the euro zone came from Italy and other euro zone countries which could revert from a disciplined fiscal policy.

She said risks came from “financial markets’ very rapid reactions to anything they perceive as fiscal easing or reversal of reforms that have been undertaken in some of the large members of the euro area.”

Her remarks seemed to refer to Italy, the bloc’s third largest economy, whose new eurosceptic government is planning higher expenditures that could increase the country’s deficit and huge debt.

“We don’t yet know what is the general economic policy set that Italy will apply,” she said, adding that a team of the fund’s experts will visit Italy in two weeks.

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