EC’s weak February ESI to add pressure on ECB to ease policy significantly

Euro area's economy is slowing down based on February's EC business and consumer survey supporting other survey indicators' message. The European Commission's Economic Sentiment Indicator (ESI) fell to 103.8 from 105.1, more than expectations and lowest level since June 2015. The ESI indicator is consistent with annual GDP growth of around 1.5%, the same as in Q4 2015. However, the growth was overestimated towards the end of 2015; hence the recent falls might hint a slowdown in growth.

Several sectoral indices dropped. The services index dropped the lowest level in six months; however, it still implies that the services output growth might increase. On the contrary, the consumer confidence declined, indicating slowdown in annual consumer spending growth from Q3's 1.7% to around 1%. The industrial sentiment indicator also dropped and indicates towards the output of the sector flatlining in annual terms.

Industrial orders fell, while production expectations reached the lowest in 18 months. The export orders also eased. Even though this implies that the small contraction in export volumes in Q3 might not last, it indicates sluggish growth in exports.

Meanwhile, construction was the only sector that recorded a positive sentiment. However, it contributes only 5% to the GDP and hence does not have a major bearing on the outlook of the economy. Meanwhile, there is some evidence that deflation pressure is building.  Industrial firms' selling price expectations fell, implying that the core producer prices will further decelerate into deflation.

Confidence amongst euro area's biggest economies dropped. Indeed, in spite of the drop, French index was little more than its Q4 average. However, the German index confirms this month's ZEW and Ifo surveys' message that growth is slowing. Meanwhile, Spain's index dropped to the lowest level in one year, implying that the political uncertainty is weighing on the Spanish economy. Moreover, the Greek ESI declining again, suggesting that the economy's recession will continue.

Overall, the data indicates that the rebound in the euro area economy is slowing and inflation will be very weak. This will further pressurise the ECB to ease policy considerably during its meeting in March.