German economic slowdown poses risk for EU recovery

13.08.14 @ 09:29

  1. By Benjamin Fox
  2. Benjamin email

BRUSSELS - Fears that the eurozone’s recovery could stall have heightened after new German data indicated the bloc’s economic powerhouse is performing at its weakest level since 2012.

  • Fears of a German economic slowdown prompted by Russian sanctions have spooked investors. (Photo: Songkran)

Published on Tuesday (12 August) the ZEW think-tank’s index of financial market confidence, a trusted indicator of German economic sentiment, hit its lowest level since December 2012, falling to 8.6 points in August - an 18.5 point fall from July.

The decline is the sharpest since July 2012, when the eurozone slipped back into a double dip recession.

The euro also fell to a near nine-month low against the dollar on the news.

In a statement accompanying the data, ZEW warned that it suggested “markedly reduced investment activities on the part of German firms against the backdrop of uncertain sales prospects.”

“Since the economy in the eurozone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected”, it said.

It added that its Indicator of Economic Sentiment for the Eurozone also saw a sharp decline in August. The indicator has lost 24.4 points since July, now standing at 23.7 points.

The decline was “likely connected to the ongoing geopolitical tensions that have affected the German economy,” ZEW noted.

Europe and the US have imposed tough economic sanctions on Russia because of its role in Ukraine but, together with Moscow’s retaliatory sanctions, European economies could suffer collateral damage.

As the currency bloc’s largest economy and manufacturer, the eurozone is reliant on Germany driving its economic recovery.

The French economy is also stagnant, while figures from Rome last week suggest that Italy has slipped back into recession.

“Fear is back,” said Carsten Brzeski, economist with the Benelux-based bank ING.

“Today’s ZEW sends a worrying signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend.”

The German treasury is due to publish official figures on Thursday on growth in the second quarter of this year.

Economists predict that the economy flatlined between April and June, after expanding by 0.8 percent in the first three months of 2014.

The EU statistical agency Eurostat will the same day also publish its first formal estimate of second quarter economic performance across the bloc.

In May, before the latest round of the EU-Russia sanctions battle, the European Commission forecast that the 18-country currency union would grow by 1.2 percent this year and by 1.7 percent in 2015.