The economic outlook after the UK referendum: Commission publishes a first assessment for euro area and the EU

The UK ‘leave’ vote on 23 June has led to increased uncertainty, financial market volatility and abrupt exchange rate movements. Today, the European Commission’s Directorate General for Economic and Financial Affairs publishes a first assessment of the economic outlook for the euro area and the EU after the UK referendum. First results were already presented and discussed in last week’s Eurogroup meeting. A prolonged period of uncertainty could influence the modest recovery in the European economy by dampening investment and consumption. The study is not an economic forecast. The Commission is due to update its next economic forecast in November 2016. To illustrate the potential effects, the Commission has analysed two scenarios, a ‘mild’ and a ‘severe’. Ahead of the UK referendum, the latest available data pointed to expected GDP growth in the euro area of 1.7% (EU28 1.8%) in both 2016 and 2017. Following the referendum, growth in the euro area would moderate to 1.5%-1.6% in 2016 and to 1.3%-1.5% in 2017, according to both scenarios. Although the depreciation of the pound sterling mitigates the economic fallout for the UK, the analysis suggests that the UK economy is likely to be more severely affected, with a GDP loss of 1% to 2.75% by 2017. Growth in the other 27 Member States would slow from an expected 1.9% in 2016 to 1.7%-1.8% and from 1.8% to 1.4%-1.7% in 2017. Neither of the analysed scenarios contains assumptions on the shape of any future agreement between the UK and the EU.