The decision of UK to exit the European Union will adversely impact the short-term growth prospect of the EU through a direct effect on trade, increased uncertainty and tightening of monetary and financial conditions due to a broader peripheral-eurozone spreads and an increase in corporate funding costs. Exiting the EU will subtract around 2 percent off the UK GDP in the coming two to three years, said BNP Paribas in a research note. Most of the impact is likely to be felt next year.

Given that around 14 percent of the euro zone’s exports go to the UK, the net trade impact is expected to subtract around 0.1 percent off the eurozone’s GDP in 2016-2017. Eurozone’s exports are likely to be adversely impacted by the UK economic slowdown due to the Brexit decision, uncertainty regarding the future relationship between the UK and the EU and the GBP’s weakening, added BNP Paribas.

Out of the four major euro area nations, Germany is the most exposed nation to the UK in terms of trade, while Italy is the least exposed. The greatest exposure is to Ireland. The nation’s exports to the UK account for 17 percent of its GDP.

Meanwhile, EU’s domestic demand is expected to be affected by the continuous uncertainty regarding the Brexit’s implications for the political debate in EU nations. This might lead to monetary tightening, whereas peripheral spreads in the eurozone might be wider for longer time, showing heightened risk aversion of financial market investors. Therefore the yearend target for Bunds yields of -20bp is likely to reach earlier, according to BNP Paribas.

Higher aversion of risk might raise the funding costs for banks and non-financial corporations in the EU. Increased funding costs for banks might translate into tighter credit conditions, noted BNP Paribas. The adverse impact of uncertainty in market and the tightening of monetary conditions of GDP are difficult to identify. However, given the past stress events, it is likely to be at around 0.4 percent in two years. Hence, eurozone GDP is expected to be 0.5 percent below the anticipated forecast in ‘pre-Brexit’ scenario for 2016-2017, with most of the impact to be felt in 2017.

“We now expect growth of 1.4 percent (down from 1.5 percent previously) and 0.9 percent (down from 1.3 percent) in 2016 and 2017, respectively”, added BNP Paribas.

Risks are tilted on the downside due to the uncertainty. Hence, uncertainty and slower growth are expected to exert renewed pressure on inflation. Core inflation is projected to surpass spring 2015’s record low of 0.6 percent year-on-year, noted BNP Paribas.