Eurozone economic growth slows, with Brexit uncertainty lying ahead

Growth in the eurozone slowed to 0.3 per cent in the second quarter of this year, a new estimate predicted Friday, amid uncertainty about whether the economy could lose even more steam in coming months due to Britain's planned EU exit.

The eurozone struggled to rev up its economy after emerging from recession three years ago, but had recently started making some headway. There are fears that the economy will now take a hit from Britain's shock decision to leave the European Union.

The preliminary growth estimate released by the EU statistics agency Eurostat on Friday is for the months that preceded the Brexit referendum vote.

The 0.3-per-cent expansion in gross domestic product (GDP) follows growth of 0.6 per cent in the first three months of this year.

Analysts chalked up the slower growth to several factors, ranging from disappointing growth in France to weaker domestic demand.

"After the strong growth in the first quarter, which was helped by some temporary factors like the mild winter weather, it was no surprise that there would be some payback in the second quarter," ING bank analyst Peter Vanden Houte said.

Most analysts now expect the Brexit uncertainty to have an impact, though its extent is still unclear.

"The third quarter started on a good footing, but it is probably too soon to start downplaying the potential negative impact of Brexit on eurozone growth," Vanden Houte said.

"The uncertainty generated by Brexit ... comes on top of already sluggish foreign demand and fading support from the weak currency and low oil prices," UniCredit chief economist Marco Valli noted. "We think GDP growth may soften."

"Uncertainty is likely to weigh on investment, with a negative feedback loop on the labour market and private consumption," Barclays analyst Apolline Menut added.

Eurostat on Friday also released new inflation and unemployment data.

Eurozone inflation edged up to 0.2 per cent following stimulus measures by the European Central Bank, but the figure remains far short of its annual inflation target of just below 2 per cent.

Analysts predicted that the central bank will come under increasing pressure to take more action.

The inflation rate has hovered around the 0-per-cent mark for months, with fears of deflation dogging the currency area.

Inflation has been pushed down mainly by falling oil prices. Energy prices continued to fall in July, decreasing by 6.6 per cent. This was offset by gains in prices for food, alcohol and tobacco products, as well as for services and non-energy industrial goods.

Unemployment, meanwhile, remained unchanged in June at 10.1 per cent, its lowest level in five years. A total of 16.3 million people were out of work in the eurozone, with 2.9 millon of them under the age of 25, Eurostat said.

The currency area has made some progress in whittling down its jobless rate since it hit a record 12.1 per cent in 2013, but many still consider it to be unacceptably high.

"Later this year we will take stock of the results obtained by measures we took at EU level ... and continue our efforts to reduce unemployment even further," said Nathalie Vandystadt, a spokeswoman for the European Commission, the EU's executive.

Last update: Fri, 29/07/2016 - 19:14

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