Eurozone economy shows resilience despite Brexit

PMI figures show only slight slowdown in pace of recovery
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The eurozone economy is proving resilient to the fallout from Britain’s decision to leave the EU, new data suggested on Friday, even as signs of a downturn intensified in the UK.

A closely watched poll of purchasing managers for the single currency area showed the pace of recovery slowing only slightly after the June 23 referendum.

A separate European Central Bank survey of private sector forecasts also showed economists expect the British decision to have only a minor impact on the region.

The purchasing managers’ index for the eurozone, compiled by data firm Markit, fell from 53.1 in June to 52.9 in July.

While activity in the eurozone rose at the slowest pace in a year and a half, the decline was less pronounced than some had feared and the figure remains well above the crucial 50 level that marks an expansion in activity.

By contrast, Markit’s comparable figure for the UK plunged from 52.4 per cent in June to 47.7 per cent in July, the lowest reading since early 2009.

“The eurozone economy showed surprising resilience in the face of the UK’s vote to leave the EU and another terrorist attack in France,” said Chris Williamson, chief economist at Markit. He added that the fragility of the region’s recovery left plenty of room for speculation about further stimulus by the ECB next year.

Brexit could dent trade between the eurozone and the UK, while the British vote has also stoked concerns about the EU’s future cohesion, contributing to a steep fall in bank stocks in countries such as Italy and Spain immediately after the referendum.

Some economists expect the eurozone’s monetary policymakers to unveil a fresh round of stimulus at their next policy vote in early September.

The latest edition of the central bank’s quarterly poll of professional forecasters showed that economists expected growth in the single currency area next year to be 0.2 percentage points lower than previously thought and a tenth of a percentage point lower in 2018.

Economists now expect on average growth of 1.4 per cent next year and 1.6 per cent in 2018, a revision that largely reflects the result of the UK referendum, the ECB said.

While only 28 of the 51 economists polled said explicitly that they had taken the UK vote into account, their downgrades were only slightly bigger than those of other forecasters. Longer-term growth expectations remained at 1.7 per cent, while forecasts for this year were also unchanged at 1.5 per cent.

Forecasts for inflation were also slightly lower, at 1.2 per cent for 2017 and 1.5 per cent for 2018 — from 1.3 per cent and 1.6 per cent respectively. Longer-term inflation expectations and forecasts for this year remained at 0.3 per cent and 1.8 per cent.

The forecasts contrast with inflation expectations based on market measures, which fell sharply following Britain’s vote to break ties with the EU.

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