In World Economy News 30/06/2016
The U.K.’s decision to leave the European Union may have brought political turmoil and sent shock waves through the markets, but new data reveals that the eurozone’s business community was largely unconcerned about a potential Brexit in the days leading up to the British vote.
British voters Thursday decided to leave the bloc after a monthslong campaign that has prompted a great deal of soul-searching among members of the EU’s political establishment. With several political parties critical of the EU gaining popularity across the continent, the British vote may not be the last.
However, a monthly measure of confidence released by the European Commission Wednesday indicated businesses and consumers were little troubled in advance of the event, despite opinion polls that suggested it would be close. That could indicate that businesses were unpleasantly surprised by the outcome, or didn’t feel that a vote for Brexit would greatly affect their prospects.
The Commission said its economic sentiment indicator for the eurozone–which aggregates measures of consumer and business confidence–fell to 104.4 in June from 104.6 in May. It remained well above its average going back to 1990 of 100.0, indicating relative optimism among businesses and consumers.
The Commission said its survey was completed before the results of the U.K.’s referendum became known on June 24.
Despite the relatively untroubled outlook shared by Eurozone business leaders before the referendum, the U.K. vote and the prospect of further upheaval within the EU are likely to weaken confidence in the months to come. Eurozone exporters are expected to see sales to the U.K. decline as consumers reign in their spending until the economic and political outlook becomes less obscure, and a weaker pound makes goods and services produced in the eurozone more expensive for U.K. households.
European Central Bank President Mario Draghi said on Tuesday that he expects the U.K.’s decision to exit the European Union to reduce economic growth in the eurozone by up to 0.5% over three years, people familiar with the matter said. In its latest economic forecasts, published earlier this month, the ECB predicted that the eurozone’s economy would grow by 1.7% in both 2017 and 2018. The economic hit is the result of the U.K.’s importance as a major trading partner and a possible perception that the EU could become ungovernable, the people said.
Should it materialize, that hit to growth will make the ECB’s task of raising inflation to its target of just under 2% even more challenging, and some economists expect the central bank to consider fresh stimulus measures later this year.
The Commission’s survey did contain some good news for ECB policy makers, as it recorded that consumers expect prices to rise more quickly over the coming 12 months than they did in May. Indeed, the Commission’s measure of inflation expectations reached its highest level since November 2014.
While economic sentiment weakened slightly across the eurozone, it picked up in the U.K., where the ESI rose to 107.0 from 105.7 in May, reaching its highest level since the end of last year.
Source: Dow Jones
