Ukraine Uncertainty Impacts on Germany’s Economy

Economic sanctions imposed by the West on Russia and continuing uncertainty over the future of Ukraine is already impacting on business and investor sentiment in Germany, the eurozone’s largest economy and the world’s fourth-biggest.

The Mannheim-based Centre for European Economic Research’s (ZEW) indicator of economic sentiment has fallen this month to a 20-month low of 8.6 points from 27.1 points in July. Economists polled by Reuters had forecast a far smaller drop, to 18.2 points.

Germany will potentially be hit hardest by the west’s stance as it is Russia’s biggest trading partner within the European Union (EU).

“Fear is back,” said Carsten Brzeski, an economist at ING. “The German ZEW just sent more signs of caution, showing that at least financial market participants are increasingly becoming pessimistic.

“Looking ahead, [the index] sends a worrying signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend. Up to now, the fallout of the Ukraine crisis has been limited to a general return of uncertainty and a sharp drop in German exports to Russia. Obviously, a further escalation of the crisis could start to really hurt the economy.”

The authors of the ZEW report said the decline in economic sentiment reflected geopolitical tensions that have begun to weigh on Germany’s growth.

“In particular, current figures on industrial production and incoming orders suggest 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.”

The index comes ahead of the first official estimate of Germany’s second quarter gross domestic product (GDP), which is expected to show either slower or zero growth, following a 0.8% rise in Q1.

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