Having dropped during June following the UK’s shock Brexit vote, European equity markets rose during July, boosted by speculation over further stimulus measures. Nevertheless, confidence remained brittle, undermined by terrorist atrocities in France and Germany , and by continuing uncertainties surrounding Brexit. European Central Bank (ECB) policymakers believe that Brexit could have a “significant” effect and may create “negative spillovers” for the euro area.
The annualised rate of inflation in the euro area rose from 0.1% in June to 0.2% in July, boosted by higher prices for food, alcohol and tobacco. The eurozone’s economy posted second-quarter growth of 0.3%, compared with first-quarter growth of 0.6%. Having grown by 0.7% during the first three months of the year, France’s economy stagnated during the second quarter. The CAC 40 Index rose by 4.8% during July but has fallen by 4.3% since the start of the year.
In Germany, investor confidence posted a sharp decline during July amid concerns over the possible impact of Brexit. The ZEW Indicator of Economic Sentiment fell to its lowest level since November 2012. The Dax Index rose by 6.8% during July but has dropped by 3.8% over the year to date.
In the wake of the UK’s Brexit decision, the International Monetary Fund (IMF) downgraded its prediction for economic growth in the eurozone to 1.6% this year, and 1.4% next year. The IMF described the eurozone’s medium-term growth prospects as “mediocre”, hampered by high levels of unemployment and indebtedness, and warned that the outlook could deteriorate further if Brexit negotiations prove protracted.
The European Banking Authority (EBA) published the results of “stress tests” carried out on 51 banks in Europe and the UK to assess their ability to withstand a severe economic shock. Allied Irish Banks and Bank of Ireland both appeared towards the bottom of the table; however, by far the worst performer was struggling Italian bank Banca Monte di Paschi di Siena (MPS). MPS revealed a rescue plan that included the sale of €9.2 billion-worth of bad loans alongside a €5 billion-worth capital injection. During July, the IMF warned that Italy’s economy is not expected to return to pre-crisis levels until the mid-2020s, and also highlighted the “strained” balance sheets of the country’s banks. The FTSE MIB Index rose by 4% over June, but has lost 21.3% of its value since the beginning of 2016.