Is the Euro Zone Headed for Another Meltdown?

Newsflash! Second quarter growth figures from the euro zone turned out mostly weaker than expected, prompting many to worry that another meltdown might be in the cards. The region has barely recovered from a debt crisis not too long ago, and it seems that more economic troubles are waiting to strike.

What’s particularly concerning about the latest set of GDP reading is that the euro zone’s strongest and largest economies have failed to impress. Germany reported a 0.2% quarterly contraction, worse than the estimated 0.1% decline in GDP, while France showed a flat reading. Italy, the region’s third largest economy, reported earlier that it slipped back into recession with its 0.2% contraction in the second quarter. Overall, euro zone’s Q2 2014 GDP reflected no growth at all during the period.

Components of the GDP reports revealed that foreign investment and trade activity slumped during the period, but that ain’t the worst of it. As Pip Diddy mentioned in his recent trading session recaps, the European Union has imposed sanctions on Russia’s banking sector to which Putin responded with a ban on food imports from Europe. In other words, the very factors that dragged euro zone growth lower in the previous quarter could be in for even more weakness!

As a result, investor confidence in Germany has tumbled to its lowest level since 2012, as the ZEW figure dropped from 27.1 to 8.6 this month. ECB Governor Draghi himself appears to be anticipating a sharper slowdown in the region, as he reiterated that the central bank is ready to dole out more stimulus if necessary. During the latest ECB statement, he mentioned that the stage is being set for additional purchases of asset-backed securities, on top of the planned targeted long-term refinancing operations for September and December this year.

On a brighter note, periphery nations appear to be faring a tad better, as growth in smaller euro zone economies prevented the region from printing a negative GDP reading. Portugal and Netherlands both returned to growth while Belgium, Latvia, Estonia, Austria, Slovakia, Lithuania, and Finland showed improved GDP readings. Economies in eastern Europe, such as the Czech Republic and Hungary, are starting to feel the effects of the conflict in nearby Ukraine as their economic expansion has slowed down.

Whether or not the euro zone can emerge unscathed from external economic threats remains to be seen, yet traders are likely to keep their eyes and ears peeled for the next batch of ECB economic forecasts to be released next month. Bear in mind that France has already downgraded its GDP forecast for this year from 1% to just 0.5%, which suggests that negative revisions from the ECB could be in the cards. Germany, on the other hand, is sticking with its upbeat estimate of 1.9% growth this year as Bundesbank head Jens Weidmann foresees a “relatively positive basic trend” despite the potential risks.