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Published On: Thu, Aug 14th, 2014

Recovery in the EU stalled in the second quarter due to weak inflation and effects of the Ukrainian crisis

The euro recovery slowed down in the second quarter in the three most prominent euro zone economies; inflation at its slowest pace since 2009.

The euro recovery slowed down in the second quarter in the three most prominent euro zone economies; inflation at its slowest pace since 2009.

Recovery stalled in the second quarter for the leading EU economies, pestered by low inflation and the impact of the deepening Ukrainian crisis.

In Germany, the GDP shrank by 0.2 percent, forecasts being for a smaller decline of 0.1 percent. In France stagnation is obvious, while Italy has slid into recession in the second quarter. The cumulative news may further pressure the European Central Bank into expanding stimulus.

Germany’s weak second-quarter data could be explained by a warm winter, enabling production shifting to earlier months. Now there is more grimness to the outlook, as international measures tighten over Russia in response to its support to Ukrainian separatists. According to economists, the stalling recovery confirms the need for further monetary stimulus. The impact of the crisis in Ukraine is still difficult to gauge.

The euro zone GDP growth declined to 0.1 percent for the second quarter, after positive 0.2 percent for the first one.

For some smaller countries, the development was better. The Dutch economy expanded by 0.5 percent, Austria’s economic growth ticked up 0.2 percent.

French GDP forecast has a 0.1 percent rise, with French economy immersed in stagnation for two quarters in a row; 0.5 percent year to year growth is expected, down from the previously announced 1 percent. This year deficit is forecasted to exceed the 4 percent limit agreed on with the EU Commission.

German economy shrank by over the 0.1 percent estimate. Construction investments last quarter slumped, with mild winter effecting output. Net trade diminished with imports outpacing exports; private and public consumption both soared.

Last month, the EU undertook stringent curbingof Russian access to bank financing and to advanced technology, and Russia sanctioned EU food products.

This month, investor confidence in Germany plummeted to its lowest level since 2012, with factory orders June decline heaviest in over two and a half years.

The euro zone is struggling to recover from its longestrecession ever. Inflation for the whole currency block for July was 0.4 percent, compared to the ECB target of close but below 2 percent. Analysts have narrowed price forecast for 2014 and for 2015.

The European Central Bank incentives package in Juneincluded a negative deposit rate and targeted bank loans. ECB President Mario Draghi warned of mounting political tension impact on the frail recovery calling for structural reforms in countries as a tool for faster recovery.

Medium term risks have augmented, and if stagnation persists and growth does not progress, the euro zone may revert to the crisis, despite ECB measures.

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