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Eurozone Economic Sentiment Lowest In Over 2 Years

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Eurozone's economic sentiment weakened for a seventh month in a row in January to its lowest level in over two years, driven by a sharp deterioration in industrial confidence caused by the lingering uncertainties linked to Brexit, global trade tensions and political threats such as protectionism.

The economic sentiment indicator fell to 106.2 from December's 107.4, survey data from the European Commission showed on Wednesday.

Economists had expected an improvement in the score to 106.8. The latest reading was the lowest since November 2016, when it was 105.6.

The industrial confidence index eased sharply to 0.5 from 2.3 in December. The latest reading, also the lowest since November 2016, was in line with economists' expectations.

With the European Central Bank assessing that the risks to Eurozone growth outlook has moved to the downside, business conditions are set to remain sluggish over the coming months. The dovish remark has almost wiped out any hope of an interest rate hike this year.

Complicating the picture, euro area core inflation is yet to embark on a sustainable path to converge with the ECB's aim of "below, but close to 2 percent."

However, ECB President Mario Draghi stressed during his post-decision press conference that the risk of recession in the euro area is very low.

Hopes of a rebound in economic activity have been kindled by Germany, which likely avoided a technical recession in the fourth quarter of 2018.

Data released earlier on Wednesday showed that France's quarterly economic growth momentum remained stable at 0.3 percent in the fourth quarter, despite the "yellow-vests" anti-government protests. However, the full year growth rate eased sharply to 1.5 percent in 2018 from 2.3 percent in 2017.

The European manufacturing activity is expected to pick-up steam once the dampening impact of the implementation of the WLTP emission tests in the automobile industry gets over.

In December, the ECB Staff trimmed the growth projection for this year to 1.7 percent from 1.8 percent.

"At this point, we think the risk of a recession this year still remains low, unless all downward risks materialize," ING economist Peter Vanden Houte said.

"That said, the best now lies behind us, and Eurozone growth should come out between 1.0 percent and 1.5 percent in 2019, nothing to cheer about."

The ECB policy will have to remain very supportive and the bank may announce a fresh round of cheap longer-term loans, the so-called (T)LTRO, for banks by June to boost lending in the real economy, the economist added.

The EU survey showed that services confidence index fell to 11 from 12.2 in December. The reading was the weakest since September 2016. Economists had predicted a score of 11.4.

The consumer confidence index remained in the negative territory, though it improved to -7.9 from -8.3, in line with the flash estimations.

Morale deteriorated sharply in the retail trade sector, while sentiment improved in the construction industry.

Separately, the European Commission reported that the business climate index for the euro area tumbled to a two-year low of 0.69 in January from 0.86 in December. Economists had expected a reading of 0.77.

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