Understanding the ZEW Indicator of Economic Sentiment
The ZEW Indicator of Economic Sentiment is a powerful sentiment indicator born out of the monthly ZEW Financial Market Survey. This survey aggregates the sentiments of approximately 350 economists and analysts, offering a predictive lens into Germany’s economic future over the medium term. ZEW stands for Zentrum für Europäische Wirtschaftsforschung, or the Center for European Economic Research.
Key Takeaways
- The ZEW Indicator of Economic Sentiment quantifies expert opinions on the direction of the German economy over the next six months.
- It is constructed based on a monthly survey engaging up to 350 analysts, financial professionals, and other experts.
- These indicators are widely used to gauge trends in the economy by leveraging various economic theories and the wisdom of crowds.
How the ZEW Indicator Works
The ZEW Financial Market Survey covers numerous areas, sectors, and regions, but focuses specifically on questions related to the German economy for the ZEW Indicator of Economic Sentiment. The technique behind the ZEW Indicator is quite straightforward: it reflects the difference between the analysts who are bullish on Germany’s economic future and those who are bearish. A negative reading indicates that the majority of analysts are bearish, while a positive reading signifies that most are bullish.
Illustrative Example: Take a scenario where 20% of respondents foresee a deterioration in the German economic situation, 30% expect no change, and 50% anticipate improvement. The ZEW Indicator of Economic Sentiment would then show a positive value of 20, indicating a prevailing bullish sentiment and hinting at positive growth prospects in the medium term.
Historically, double-digit readings in sentiment indicators are not rare. For example, in 2018, the ZEW Indicator of Economic Sentiment shifted from a positive 20.4 to -25 over seven months, during which Germany’s economic growth decelerated from 2.2% in 2017 to 1.5% in 2018. Sentiment indicators like this one can sometimes amplify perceptions of economic changes.
The Role of Sentiment Indicators
Sentiment indicators have long been popular tools for gauging and forecasting economic and market trends. These indicators align with various economic theories, despite diverging on other analytical fronts.
Theke Keynesian economics, which emphasizes psychological forces as catalysts for market movements, and rational expectations theory, suggesting market participants use comprehensive data to predict economic trends accurately. Both schools of thought validate the utility of sentiment indicators.
Typically, sentiment indicators employ surveys to capture opinions or anticipations regarding future economic trends. Relying on large groups, these indicators leverage the wisdom of crowds—where the collective opinion of a large number of people is presumed more accurate due to dispersed and smoothed-out individual biases.
Broad Application
These surveys reach a wide array of respondents including investors, CEOs, supply chain managers, small business owners, bank lending officers, or everyday consumers. For instance, a consumer sentiment survey might gauge optimism levels and planned big-ticket purchases over the next six months. Other indicators might target specific key market protagonists, like experts in the ZEW Index of Economic Sentiment, presumed to possess superior insights into future economic trajectories.
The Data Behind the ZEW Indicator
Collating around 350 expert opinions, the ZEW Indicator aggregates sentiment on numerous economic facets, encompassing general economic outlooks, inflation rates, interest rates, stock markets, exchange rates, and oil prices over the forthcoming six months. Participants hail from diverse sectors, including banking, insurance, and corporate financial departments.
The Index calculates in percentage terms the net difference between optimistic and pessimistic experts regarding Germany’s economic outlook over the next six months. Beyond Germany, the ZEW Financial Market Survey extends its purview to the economic prospects of other nations and regions such as Japan, the United States, the eurozone, the UK, France, and Italy.
By scrutinizing this vital index, investors and policymakers can glean vital indicators—not just about the specific terrain it surveys but for broader macroeconomic forecasting.
Related Terms: Bullish, Bearish, Economic Forecasting, Wisdom of Crowds, Inflation Rates, Exchange Rates, Interest Rates.
References
- ZEW. “ZEW Financial Market Survey & ZEW Indicator of Economic Sentiment”.
- ZEW. “ZEW Finance Market Report 2018”, Page 1. In German only.
