IMF Sees Risks to Europe Economic Outlook From Markets, Trade

(Bloomberg) -- Economic growth across Europe dropped a gear in the first quarter and the International Monetary Fund warned that threats ranging from overvalued market pricing to rising protectionism could disrupt growth.

While the near-term prospects are “balanced” and the region’s economy looks strong for now, “beyond the near term, risks are clearly tilted to the downside,” the fund said in a report published on Tuesday.

“The most immediate risks stem from rich valuations in financial markets at the global level, notably an exceptionally low term premium and a growing tendency toward inward-looking economic policies.”

-IMF Regional Economic Outlook

The comments come amid a debate over whether the slowdown in Europe this year will prove temporary or more persistent. Data on Tuesday showed slower-than-forecast growth in Germany, Portugal, Netherlands and the euro area as a whole in the first quarter, while a similar trend was seen in central and eastern Europe.

With prospects looking less bright in the longer-term, the IMF -- echoing an often repeated line -- urged policymakers to seize the moment to build room for fiscal maneuver and push reforms to boost growth potential. The need is particularly pressing because central banks have little scope for easing in response to any new shocks, it said.

Simmering protectionism has become a new area of concern among policymakers and businesses, who fear that a major trade war could undermine global growth. But the IMF also pointed to other external factors including a “significant slowdown” in China and geopolitical tensions.

IMF Concerns:

  • Increasingly overstretched asset valuations and compressed term premiums at the global level
  • With the reduction of monetary accommodation, highly indebted euro-area countries could struggle with higher financing costs if they don’t take steps to build fiscal buffers
  • Remaining vulnerabilities in parts of the euro-area banking system could reignite financial distress
  • Protracted policy and economic uncertainty, including Brexit and newly elected governments in major European countries

It urged the bloc to complete the banking union -- the set of joint rules for banking supervision and resolution across the largest euro-area banks -- through a common deposit insurance and backstop for the bloc’s fund to wind down failed lenders.

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