Global tensions darken Europe’s economic outlook

Global tensions are taking their toll on Europe’s economic outlook. 

After grinding to a halt in the second quarter, the region’s gross domestic product could fall back into negative territory in the coming months, as the economic Cold War between the West and Russia and other global flashpoints hit economic sentiment and consequently investment.

The second half of the year looks especially challenging as severe tensions in the Middle East and the Ukraine are likely to weigh on business activity.

Key indicators have already been sending out warning signals, with the Munich-based Ifo institute’s economic confidence index for the currency bloc falling sharply for the third quarter.

The slowdown in the eurozone from 0.2% in the first quarter to zero in the three months ended June is also likely to fuel concerns that the currency bloc’s weak economic activity could push the region closer to the brink of deflation.

This in turn is likely to renew the pressure on the European Central Bank (ECB)  to step up its efforts to spur economic growth and to head off deflation, which also threatens to derail the region’s faltering recovery from a protracted recession.

The stagnation of the eurozone economy in the second quarter underlines the need for the ECB to take bolder policy action to address the continued weakness of the economy and the associated risks of deflation, according to economists.

Figures released this week by the European Union statistics office Eurostat confirmed that annual eurozone inflation hit its lowest rate in more than five years in July, slowing to 0.4% from 0.5% in June.

The darkening economic outlook came just as signs of life emerged from the battered economies that have been at the centre of the region’s long-running debt crisis.

But dragging down the eurozone’s overall performance was a slowdown in the region’s three biggest economies - Germany, France and Italy.

While Germany contracted by a surprise 0.2% and France posted its second quarter of stagnation, Italy stumbled back into recession for the third time since 2008, just as Rome struggles to press on with an ambitious reform agenda.

Hopes had been raised that signs of a pickup in the world’s two largest economies - the US and China - as well as a weaker euro might help to drive economic growth in the eurozone in the run-up to the end of the year.

But speaking at a press conference last week, ECB chief Mario Draghi said that US growth would outstrip the eurozone this year.

In addition, many eurozone states are still battling on with tough fiscal austerity programmes in a bid to cut back high debt and deficit levels, as a result further dampening economic growth.