FRANKFURT - Germany's central bank on Monday warned that global tensions including the Ukraine crisis have clouded its outlook for this year, although it does not expect the Europe's biggest economy to shrink further.
"A flurry of unfavourable news reports relating to the international environment have dampened Germany's economic outlook in the second half of the year," the Bundesbank wrote in its latest monthly report.
"Current indicators cast doubt on the assumption on which the spring forecasts were based, namely that the underlying cyclical trend would strengthen further in the second half of 2014," it said.
"Nonetheless, sentiment has deteriorated from a high level, which, together with the fact that the trend for domestic demand remains basically upwards, suggests that the economy will not change direction," the Bundesbank wrote.
German gross domestic product (GDP) contracted by 0.2 percent in the second quarter, after growing by 0.7 percent in the first three months of this year, as geopolitical risks from the crises in Ukraine and the Middle East weighed on sentiment.
In the euro area as a whole, which stagnated in the second quarter, there would be a "resumption of positive economic growth, albeit not at the pace predicted by many analysts in the spring," the Bundesbank predicted.
The underlying cyclical trend in some member countries was turning out to be weaker than expected.
"At the same time, the geopolitical tensions in Eastern Europe owing to the Ukraine conflict as well as in other parts of the world are now appearing to weigh more heavily on corporate sentiment.
"Although they will only affect a small percentage of EU exports directly, the recently enacted EU sanctions and the Russian response are likely to dampen sentiment," the report said.