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Published On: Mon, Aug 11th, 2014

Ukraine and Middle East conflicts put the EU brittle economic recovery to test

EU economy’s output for the second quarter has ground to a halt, the tit-for-tat sanctions between Russia and the West are undermining business confidence. 

Ukraine and Middle East conflicts put the EU brittle economic recovery to test.

The conflicts escalating in Ukraine and Iraq are impacting global mood, and investors are to gauge how strong the euro zone economy is. Contrasted to the strong growth witnessed in the US and Britain, the EU block’s economic output has declined to a halt in the second quarter. Germany’s stellar economy is slowing down, Italy is back into a recession.

The euro zone will announce its economic output data for the April-June quarter on Thursday. Germany will also report its GDP data for the same period. Neither the euro zone, nor Germany itself, however, can even hope for better figures compared to the first quarter of the year.

Matters can be further complicated by tit-for-tat sanctions between Moscow and the EU, and by mounting fears of Russia invading eastern Ukraine. These global security threats are seriously undermining business confidence and further decelerating the faint economic growth this year.

Moscow supplies around a third of the necessary gas in the EU. Furthermore, Russia and the EU are trading partners in a number of other areas. For example, the German energy company E.ON has invested 6 billion euros in Russia, and chemical company BASF has a joint venture with Russian Gazprom.

Although the market has neglected geopolitical risks until recently, the turmoil in Ukraine and the bundle of spiraling sanctions are already reversing that stand. The Iraq crisis can also take a toll.

Against the background of gloom EU prospects and slowing Chinese economy mega-growth, the US has boosted global hope with a solid rebound.

Great Britain is seeking reassurance that economic growth is transmitting to the labor market in the form of higher wages, a solid proof that recovery will stick after central banks make borrowing more expensive.However, the Bank of England is expected to point to a surprisingly slim pay growth on Wednesday in its economic projections, raising concerns about the central bank’s readiness for its first interest rate hike since the outburst of the financial crisis.

Unemployment is set to decline, but earnings are also predicted to be lower compared to a year earlier. The situation is similar to the US gap between mounting employment figures and lagging pay. Living costs continue to exceed wage growth. For a solid recovery in the US and the UK, wages have to increase in line with credit – something that is not yet taking place.

In China, industrial output readings will indicate performance in the third quarter, following government moves to stimulate lending to businesses.

There was a slight boost in China’s economic pace, yielding a 7.5 percent growth in the second quarter, with the government expanding railway and public housing construction. But there are serious obstacles for the economy including but not limited to: a downturn in property prices, not overcome by efforts to facilitate buying, and high indebtedness of local governments. Deeper reforms are needed in the long-term, such as monitoring massive state companies, for the economy to reach the desired pace.

The euro zone remains the problem spot. Last week the European Central Bank expressed readiness to print money and purchase bonds if the situation in the block changes to the worse. Mario Draghi underlined the different course undertaken by the US is not a deterrent. That, however, may not be reassuring enough for investors alarmed over prospects of the Fed imposing further tightening.

About the Author


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