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Advanced European economies not exempt from growth slowdown

Advanced European countries should expect economic growth slowdowns over the next year due to global trade tensions, aging populations and political uncertainties, International Monetary Fund European Department Director Poul Mathias Thomsen said Oct. 18.

Speaking to reporters on the fourth day of the IMF's annual meeting in Washington, Thomsen said economic growth has slowed further since the organization's April meetings, especially in Germany and Italy, with their large manufacturing and export sectors. The United Kingdom also has underperformed due to Brexit-related uncertainties, he noted.

Thomsen attributed the slowdown in growth to continued global trade tensions and uncertainty surrounding Brexit, both of which remain front-and-center in the global policy sphere. Performance in advanced European nations has been "disappointing," Thomsen said, noting that the lackluster recovery is also a byproduct of aging populations and other demographic factors.

Italy, in particular, has had very low growth for a number of decades, he said, noting its fundamental problem of low productivity, which continues to fall short of its European peers.

In response, the group lowered its growth forecast for advanced European nations for 2019 "marginally," to 1.3% from the previously estimated 1.4%. The IMF estimates a "modest" recovery in advanced Europe's growth to 1.5% in 2020.

Emerging European markets also have experienced a slowdown in growth, but "significantly less" than their advanced-economy counterparts. The IMF cut its forecast to 3.1% growth in 2020 for the emerging markets after 3.7% projected growth in 2019.

The IMF forecasts a less-significant slowdown in emerging Europe due to projected rebounds in the European export market and the assumption that strong labor markets are expected to continue to underpin domestic demand.

The IMF did not recommend discretionary fiscal measures in the short term despite the slowdown. Instead, fiscal policy should remain focused on medium-term objectives, especially in European countries with high debt.

Policymakers should have plans ready to go to inject high-impact fiscal stimulus if downside risks materialize on a significant scale, he said, especially in countries with limited fiscal space.

"Clearly there are some risks to this forecast," Thomsen said. "This projected recovery is predicated on the assumption ... of no further escalation of trade tensions. But we're still clearly concerned about a risk in the escalation of trade tensions."

Although details are scarce, the Brexit deal draft between the U.K. and EU announced Oct. 17 is in line with the department's previously made baseline assumptions in its forecast, Thomsen said.

"Our baseline does not have a cliff-edge Brexit. From that point of view, this agreement is good news."

The IMF now predicts a 3.0% expansion in the global economy in 2019, a 0.3-percentage-point downgrade from its previous forecast, due in part to U.S.-China trade frictions, political uncertainty and a global manufacturing slowdown.

Separately, Thomsen said the direct impact to the EU is limited from the World Trade Organization's recent ruling that the U.S. can impose tariffs on $7.5 billion of European goods following a long-standing dispute involving European-provided subsidies to aircraft producer Airbus SE. Still, he cautioned that any further negative developments in the case could escalate other more-recent trade tensions between the U.S. and the EU.