What Is the ZEW Indicator of Economic Sentiment?
The monthly ZEW Financial Market Survey is the source of the straightforward sentiment indicator known as the ZEW Indicator of Economic Sentiment. The medium-term economic outlook for Germany is compiled from the opinions of over 350 economists and analysts who participate in the ZEW Financial Market Survey. Zentrum für Europäische Wirtschaftsforschung, or the Center for European Economic Research, is what ZEW stands for.
Understanding the ZEW Indicator of Economic Sentiment
The ZEW Indicator of Economic Sentiment is derived from the questions in the ZEW Financial Market Survey that are explicitly connected to the German economy, out of a survey that includes many other topics, industries, and regions. This data generates a simple indicator reading that illustrates the difference between the number of optimistic analysts and those who are pessimistic about the German economy. The majority of experts are pessimistic if the task has a negative percentage. Positive readings indicate that most people are bullish.1.
For example, the ZEW Indicator of Economic Sentiment would have a positive score of 20 if 20% of respondents anticipate the German economic situation to worsen, 30% expect it to stay the same, and 50% expect it to improve. This optimistic rating indicates that finance specialists see promising development in the medium run.
As a measure of sentiment, double-digit numbers are typical. For instance, during the first seven months of 2018, the ZEW economic sentiment indicator dropped from a favorable rating of 20.4 to -25. German economic growth slowed throughout this period, falling from 2.2% in 2017 to 1.5% in 2018; however, as sentiment measures are known to do, the effect on the ZEW Indicator of Economic Sentiment considerably inflated the severity of this downturn. There are two mood markers.
Economic mood indicators are widely used to assess and predict market and economic developments. Although there may be significant differences in the assumptions and conclusions of different economic theories, they generally endorse using such indicators.
These include rational expectations theory, which holds that market participants as a whole use all relevant and available economic information along with a roughly accurate understanding of the structure of the economy to efficiently form rational expectations of future economic trends, and Keynesian economics, which focuses on investor and consumer psychology as fundamentally irrational driving forces of recessions and business cycles.
Sentiment indicators are often surveys that ask different groups of individuals involved in the economy about their thoughts and intentions about future actions and economic trends. Sentiment indicators are designed to make use of the wisdom of crowds via mass surveys. This is the theory that although individual thought processes may be prone to error, the average thought processes of many people tend to combine more disparate information and are, hence, more likely to be correct.
CEOs, supply chain managers, small company owners, bank loan officers, investors, and customers are some examples of the groups that may be polled. For instance, a consumer mood survey would ask a sample of respondents if they anticipate making any significant purchases in the next six months and whether they feel upbeat about the state of the economy. Specific indicators, like the ZEW Index of Economic Sentiment, are aimed at professionals with superior insight into future economic trends. In contrast, others, like the consumer and investor index, are directed at important players directly influencing markets.
The Information Underlying the ZEW Economic Sentiment Indicator
As previously indicated, the ZEW Indicator of Economic Sentiment aggregates the opinions of over 350 economists and experts to provide a picture of Germany’s economic outlook. These professionals work for banks, insurance providers, and the financial divisions of particular firms. They are questioned about what they anticipate happening in the next six months regarding the economy, currency rates, inflation, interest rates, stock markets, and oil prices.
The index itself is determined by subtracting the proportion of experts who are pessimistic about Germany’s economy for the next six months from the positive percentage about it.
The ZEW Financquestions asks questions on the economic prospects of several foreign nations and areas, such as Japan, the US, the EU, France, Italy, and the UK, in addition to the German economy.
Conclusion
- The ZEW Indicator of Economic Sentiment gauges the consensus among experts on the course of the German economy in the next six months.
- A monthly poll of up to 350 analysts, financial professionals, and other specialists is the basis for its construction.
- Various economic theories and the wisdom of crowds are used to measure economic trends via indicators of expert and public opinion.
