Brexit impact: EU downgrades economic outlook for UK, bloc

Says the vote has ushered in uncertainty and would weigh on the growth

The European Union (EU) downgraded its economic outlook for Britain and the rest of the bloc on Tuesday, saying the Brexit vote ushered in uncertainty and would weigh on growth.

The gross domestic product (GDP) growth in the 19-country eurozone is expected to slow to between 1.3 and 1.5% in 2016 from the previously estimated 1.7% in May. The same growth figures are expected for next year, Xinhua news agency reported.

This implies a loss of GDP of 0.25 to 0.5% by 2017, which is less than in Britain (1.0 to 2.75%), said a report published by the European Commission, the bloc's executive arm.

"The UK's 'leave' vote is expected to slow private consumption and investment and impact on foreign trade," it noted.

The report warned that Britain's referendum had created an "extraordinarily uncertain situation," which is likely to prevail for some time, and would affect not only Britain but also the rest of the EU economy through several transmission channels, mainly uncertainty, investment, trade, and migration.

The increased uncertainty in Britain and other member states was expected to hamper investment decisions either by delaying them or by taking them off the table, at least until the uncertainty diminishes.

While the bloc is struggling to fight the almost double-digit unemployment rate, unfortunately, the Brexit vote is predicted to slow the ongoing labour market recovery as increased risk aversion and subdued domestic demand would have a negative impact on firms' hiring decisions.

Inflation is another major concern for the bloc, which is keen to hit a target of around 2.0%. The conclusion of the report is welcoming though as it suggested that the Brexit vote's impact on inflation in the single currency zone would be "only marginal".

Moreover, the vote has increased or even created political risks which, if they were to materialize, could massively alter the forecast. However, such risks are extremely difficult to quantify, Xinhua news agency quoted the report as saying.

Overall, Britain's "leave" vote has increased risks to the outlook with downside risks strongly dominating, it added.