Uncertainty, weak exports reduce expectations of upbeat Eurozone economic growth

The eurozone economic growth expectations have been reduced post the Brexit outcome, following global financial uncertainty and weak growth in exports. Brexit puts pressure on still fragile domestic demand, a weak banking sector, particularly in Italy and hampers new lending, reports said.

Due to the Brexit vote, KfW Research has slightly reduced its German economic growth forecast for 2016 to 1.5 percent from 1.7 percent previously and that for 2017 more significantly to 1.2 percent (previously 1.8 percent). The euro area is expected to grow by only 1.3 percent in 2016 and 1.1 percent in 2017 from previous 1.6 percent and 1.8 percent respectively.

However, the largest negative impact is likely to be on the United Kingdom itself. First, companies' demand for goods will probably decline in response to Brexit. Firms based in the EU's second largest economy will hold back from investing for the time being. It is not only the UK's future economic development that is unclear in the wake of Brexit, political uncertainty also plays a greater role than in other European countries, the report said.

In addition, British households are expected to remain even more cautious on the spending side. Slower employment generation will lead to more moderate income growth. A looming rise in inflation due to the devaluation of sterling will reduce purchasing power faster than the export sector can benefit from increased competitiveness.

Further, mounting fear of job losses will aid savings due to a precautionary move. Finally, greater uncertainty in property markets will expectedly reduce the expected asset values of UK home-owners, especially in London.

In addition, the outlook for British exports remain gloomy until the negotiations on Brexit with the European Union is completed. However, demand from the EU for British exports is expected to decline, because Brexit will also strain the economic recovery in the rest of Europe. The pound's depreciation by 11 percent against the euro and 15 percent against the US dollar will help exports in principle. But since the UK economy has little export-oriented industry, reluctance to invest and consume is likely to have a greater impact on growth.

"Overall, we believe the economic pressures after Brexit will be greater in the UK, as the epicentre of the shock wave, than in the rest of Europe," KfW Research said in a recent research note.

Meanwhile, the European Commission, EU member states and the Italian government must do everything in their power to arrive at a common solution within the terms of the new banking directive. It is expected that the rules are sufficiently flexible to allow this.