July 19, 2018 / 2:19 PM / a year ago

Euro zone growth risks serious, could lead to hard landing, IMF warns

Euro coins are seen in front of displayed flag and map of European Union in this picture illustration taken in Zenica, May 28 2015. REUTERS/Dado Ruvic

FRANKFURT (Reuters) - Euro zone growth has peaked and risks to the outlook are “particularly serious”, raising the chance of a hard landing for the currency bloc, the International Monetary Fund said in a regular assessment on Thursday.

With investments, consumption and job creation still trending up, there is room for the expansion to run at least for the next “couple” of years but both external and domestic risks are on the rise, the IMF added.

“Risks are particularly serious at this time,” the IMF said. “Recent events have skewed the balance of risks downward, reflecting both domestic and global factors.

“If these were to materialise, the economy could yet be tipped into a hard landing,” the IMF added, warning about the risk of a full-fledged global trade war, the threat of a hard Brexit and reform complacency by euro area governments.

Growth slowed sharply in the first quarter but more recent indicators from industrial output to sentiment readings appear to show that the expansion has levelled off at a rate that is still above the bloc’s potential, even if well below exceptional rates seen at the start of the year.

“There are good reasons, still, to expect a soft landing ... (but) medium-term growth prospects remain lacklustre,” the IMF said in a so-called Article IV Consultation, a regular surveillance exercise.

The five-year growth run has been supported by exceptionally loose monetary policy and the IMF warned the European Central Bank against removing this stimulus too quickly as markets could quickly punish weaker euro zone members, forcing governments to make costly spending cuts.

“The ECB’s commitment to keep policy rates at their current, extraordinarily low levels at least through next summer is vital,” the IMF added. “Raising rates too early could be a costly error - for the euro area, and for the rest of the world.”

Reporting by Balazs Koranyi; Editing by Alison Williams

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