Uncertainties caused by Britain's vote to leave the European Union will cause euro zone economic growth to decelerate to 1.4 per cent in 2017 from 1.6 percent this year, and downside risks are piling up, the International Monetary Fund said on Friday.

In its annual policy review of the 19-country bloc, the IMF said a further global growth slowdown could derail the euro area’s domestic demand-led recovery, and further Brexit spillovers, the refugee surge, increased security concerns and banking weakness all could take their toll on growth.

But IMF European department deputy director Mahmood Pradhan said that if the separation negotiations drag out between the EU and the UK and continues to cause risk reductions in financial markets, euro area growth would slow further.

"If that risk aversion is prolonged, we think the growth impact could be larger and at this point, it is very difficult to tell how long that period lasts," Mr Pradhan told reporters on a conference call. He added that the 1.4 percent growth scenario for 2017 assumes a relatively swift negotiation of a deal that would preserve full tariff-free access to the EU common market for Britain.

Even this “best-case” scenario will cause a slowdown in investment and weigh on consumer and market confidence, he said.

In the report, the IMF said medium-term prospects for the euro zone are “mediocre”, constrained by crisis legacy problems from high unemployment, elevated public and private debt and deep-rooted structural weakness.

“As a result growth five years ahead is expected to be about 1.5 per cent, with headline inflation reaching only 1.7 per cent,” the IMF said.

Reuters