The International Monetary Fund (IMF) said on Friday that the euro area GDP growth was expected to decelerate to 1.6 percent this year, mainly due to the negative impact of the UK referendum.
Before the June referendum, during which the country voted to leave the European Union (EU) after 43 years in the bloc, the IMF had expected the euro zone growth would reach 1.7 percent both this year and next year.
The IMF also cut down the eurozone GDP growth in 2017 further to 1.4 percent.
The Washington-based lender expected the recovery in the euro area will continue to be supported by lower oil prices, neutral fiscal stance, and accommodative monetary policy.
But downside risks have grown. "Inflation remains too low, and weak investment, still high unemployment, and the aging of the population will continue to hurt productivity, raising the risk of stagnation," said Mahmood Pradhan, mission chief for the euro area.
In addition, political risks, such as Euroscepticism, are rising, which are expected to exacerbate the subdued economic outlook.
The IMF warned that the recent UK referendum is likely to lead to persistent uncertainty regarding its new status with the EU.
"The UK referendum will affect not only the economy of the UK but also the economy of euro area," said Herve de Villeroche, executive director for France at the IMF and president of the EU representatives to the IMF.
Villeroche said that political and economic uncertainty during the exit negotiations can lead to financial market tensions and higher risk premium in the near term, as well confidence effects.
But the medium term impact will depend very much on the future bilateral regime between the EU and the UK and the policy response by the EU.
The IMF called on the euro area to push the structural reforms to improve business climate and employment in order to counter the risk of stagnation. It also suggested they strengthen fiscal policy and expand centralized support to boost demand.
Accommodative monetary policy should continue, said the IMF. It also noted that additional monetary easing will be necessary, mainly through larger asset purchases, if inflation stays stubbornly low or dips further.
