Euro zone to grow ‘more slowly’ because of Ukraine crisis

The euro zone economy is expected grow more slowly than initially expected during the rest of this year as conflicts in Ukraine and elsewhere weigh on business confidence, Germany's central bank said today.

The euro zone economy unexpectedly stalled in the second quarter, dragged down by shrinking growth in Germany and a stagnant France, leading to renewed calls for the European Central Bank to provide more stimulus, such as large-scale asset purchases.

The ECB cut interest rates to record lows and launched a fresh round of ultra-cheap loans in June, which the Bundesbank said was "justifiable, on the whole".

But the German central bank also warned about overheating financial or property markets, and the risk of minimising governments’ incentives to reform their economies.

“Following second-quarter stagnation, the euro area is looking at a resumption of positive economic growth, albeit not at the pace predicted by many analysts in the spring,” the Bundesbank said in its monthly report for August.

"The geopolitical tensions in Eastern Europe owing to the Ukraine conflict as well as in other parts of the world are now appearing to weigh more heavily on corporate sentiment."

European sanctions against Russia and the country's response had in particular dampened sentiment, the Bundesbank said, though noting that the trade restrictions would only affect a fraction of EU exports directly.

Investors were particularly anxious about the surprise second-quarter contraction in Germany, seen as the currency bloc’s growth engine.

Little improvement is expected in the second half of the year as the Bundesbank pointed to a dampened economic outlook.

“Current indicators cast doubt on the assumption on which the spring forecasts were based, namely that the underlying cyclical trend would strengthen further in the second half of 2014,” the Bundesbank said.

“Nonetheless, sentiment has deteriorated from a high level, which, together with the fact that the trend for domestic demand remains basically upwards, suggests that the economy will not change direction.”

Private consumption and housing construction formed the main pillar of German growth, the Bundesbank said, in light of increasing disturbance from the external economic situation.