Euro zone economy resilient to Brexit: so far

[July 28, 2016]  By Balazs Koranyi

FRANKFURT (Reuters) - The euro zone economy has remained surprising resilient to the shock of Britain's vote to leave the European Union, fresh data showed on Thursday, a big contrast to the UK where signs of widespread economic pain are already apparent.

Euro zone economic sentiment improved this month, defying expectations for a decline, and German unemployment fell more than anticipated, supporting views that the bloc has so far shrugged off the impact of Brexit.

Still, Europe is unlikely to escape unscathed, economists argue. Export, investment and sentiment are likely to take at least a moderate hit in coming months as firms come to grip with the reality that Brexit in one form or another is irreversible.

"The stability/resilience in the euro area was broad-based across sectors in July and there is also nothing in the detail to suggest increased concern about the future," JPMorgan economist Greg Fuzesi said. "It is too early to draw strong implications for our growth forecast, but the initial news is certainly better than expected."

Euro zone sentiment improved in industry, services, retail and the construction sector while the business climate index, pointing to the phase of the business cycle, also increased sharply.

Forward-looking indicators were also solid, particularly for employment and services, even as manufacturing expectations dipped, reversing some of the previous month's big gain.

Rebounding after a second weak quarter, Germany is again expected to be the engine of euro zone growth, preserving momentum at least for now.

"Employment growth is robust and is set to stay high according to the latest sentiment indicators," HSBC economist Rainer Sartoris said.

"This view is supported by the number of unfilled positions, which keep on rising. The high demand for labour should continue to support wage growth, which will continue to support private consumption," he added.

Such an upbeat outlook is in contrast with data out of Britain, where sentiment plunged this month, with consumer confidence taking the biggest hit and losses recorded across all sectors.

The figures come on top of already grim reading in recent days, which suggest Britain may struggle to stave off a recession.

British retailers suffered their sharpest fall in sales in four years after last month's EU referendum while the purchasing managers index, the broadest survey of business confidence, fell by the most in its 20-year history.

A worker is seen behind scaffoldings at a construction site near the Fernsehturm television tower in Berlin July 7, 2014. REUTERS/Thomas Peter

The weak figures, which negate the impact of a sanguine second quarter GDP reading, all but assure that the Bank of England will cut rates next week for the first time since 2009.

But any brush with recession is bound to spread at least in part to the continent, weighing on growth and holding back the euro zone's slow but steady recovery.

Indeed, a broad survey by the European Central Bank last week indicated that Brexit would reduce euro zone growth by 0.26 percentage point next year, a significant chunk for a bloc that is growing at only around 1.5 percent.

"Combined with the significant fall in UK confidence indicators, we continue to believe the eurozone growth will not be immune to the UK decision to leave the EU," Clemente De Lucia, an economist at BNP Paribas said.

"The analysis of sub-components suggests the impact is likely to take more time to be reflected in the data. We estimate the total impact of Brexit on the bloc at about 0.5 percent of GDP over the next year and a half."

(Additional reporting by Jan Strupczewski in Brussels; editing by Mark Heinrich)

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