Global Economic Outlook Becomes Increasingly Uncertain Following Brexit Vote: ECB, Reports Reuters

By Francesco Canepa

FRANKFURT – The global economic outlook has become increasingly uncertain following Britain’s decision to exit the European Union, according to a statement from the European Central Bank (ECB) on Thursday. The bank reaffirmed its readiness to take action to support inflation within the euro zone if necessary.

In the aftermath of the referendum held on June 23, financial markets experienced significant volatility but have since returned to a state of relative calm. However, economists caution that the full economic implications of Brexit may still be unfolding.

"Financial market volatility following the UK referendum on EU membership was short-lived," the ECB noted in its regular economic bulletin. "Nevertheless, uncertainty regarding the global outlook has risen, while recent data for the second quarter indicates sluggish global activity and trade."

Surveys indicate that the UK economy is contracting at its fastest pace since the financial crisis of 2008-09, and a reduction in interest rates by the Bank of England is widely anticipated.

While the euro zone economy has largely managed to weather the Brexit impact so far, the ECB maintained its expectation for a "moderate" recovery. This sentiment was echoed by Jens Weidmann, head of Germany’s central bank and one of the more hawkish members of the ECB.

"My impression is that the economic outlook for the currency area has not fundamentally changed due to the Brexit vote," Weidmann remarked in interviews with German and Italian media. He noted that while there may be a slight dampening effect, the overall upward trend is likely to persist, although it is too early to provide reliable forecasts about future price developments.

Investors are increasingly betting on the ECB extending its monthly asset purchase program of 80 billion euros beyond its current end date in March 2017, with changes to the terms of the initiative anticipated to address constraints on government bond purchases.

In line with President Mario Draghi’s statements from July, the ECB indicated it would await additional information, including new staff projections to be released in September, before deciding on any new policy measures.

"If necessary to achieve its objectives, the Governing Council will utilize all available instruments within its mandate," the central bank asserted.

Weidmann opened the door to potential adjustments but emphasized the importance of adhering to rules that dictate that government bond purchases reflect each country’s contribution to the ECB’s capital structure, which positions Germany as the leading beneficiary.

"If we grant special conditions to specific countries or focus excessively on those with high debt levels, we would further blur the lines between monetary policy and fiscal policy," Weidmann cautioned.