Euro zone economic growth slows in quarter before Brexit

[July 29, 2016]  By Francesco Guarascio

BRUSSELS (Reuters) - Economic growth in the euro zone slowed in the second quarter as uncertainty before the British vote to leave the European Union swirled, data showed on Friday, and economists said it could be a sign of future weaker growth.

Gross domestic product (GDP) in the 19 countries sharing the euro rose 0.3 percent quarter-on-quarter in the April-June period, halving from the 0.6 percent growth in the first quarter of the year, European statistics office Eurostat said.

A slowdown was expected after the strong euro zone growth in the first three months of the year, but it may have been compounded by the uncertainty preceding the 23 June British referendum.

Although first confidence data after Brexit showed unexpected optimism in the euro zone, the economic impact of Britain's decision to leave the union may be felt later.

"The third quarter started on a good footing, but it is probably too soon to start downplaying the potential negative impact of Brexit on euro zone growth," said Peter Vanden Houte, economist at ING bank.

After the Brexit referendum, the European Commission and the European Central Bank slightly revised down their forecasts on euro zone GDP growth this year and in 2017.

Beyond Brexit, weaker global trade and the lower positive impact of tailwinds may contribute to a further slowdown of the euro zone economy in the coming months.

"We think that this slowdown in growth is a sign of things to come," Jack Allen at Capital Economics said. "We think euro zone GDP growth will slow further over the rest of the year," he added citing the fading positive impact of low oil prices and the weak euro as causes for the possible further slowdown.

The GDP preliminary estimates released by Eurostat did not include data on individual euro zone countries, but figures released earlier on Friday by the French statistics office showed a worse-than-expected flat growth in the second largest economy of the bloc.

A worker controls a tapping of a blast furnace at Europe's largest steel factory of Germany's industrial conglomerate ThyssenKrupp AG in the western German city of Duisburg December 6, 2012. REUTERS/Ina Fassbender/File Photo

The disappointing French reading was due to weak consumer spending and a drop in business investment.

The slowdown of the euro zone economy may strengthen the case for further stimulus from the European Central Bank, which has already cut its deposit rate to minus 0.4 percent and buys 80 billion euros ($88.5 billion) of assets per month in a bid to counter ultra-low inflation in the currency bloc.

First estimates on euro zone inflation released on Friday by Eurostat showed a slight rise to 0.2 percent in July from 0.1 percent the previous month, but still far away from the ECB target of a rate close to 2 percent, while core inflation remained stable.

(Reporting by Francesco Guarascio; editing by Philip Blenkinsop/Jermey Gaunt)

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