What is the ZEW Indicator of Economic Sentiment?
The ZEW Indicator of Economic Sentiment is a simple sentiment indicator created out of the monthly ZEW Financial Market Survey. The ZEW Financial Market Survey is an aggregation of the sentiments of approximately 350 economists and analysts on the economic future of Germany in the medium-term. ZEW stands for Zentrum für Europäische Wirtschaftsforschung, which translates to the Center for European Economic Research.
Understanding the ZEW Indicator of Economic Sentiment
The ZEW Financial Market Survey covers a number of areas, sectors and regions, but only the questions related specifically to the German economy are used to create the ZEW Indicator of Economic Sentiment. From this data, a simple indicator reading is given showing the difference between the number of analysts that are bullish on the German economy versus those who are bearish. If the reading is a negative percentage, it means the majority of analysts are bearish. If the reading is positive, it means the majority is bullish.
For example, if 20% of respondents expect the German economic situation to deteriorate, 30% expect it to remain unchanged and 50% expect it to improve, then the ZEW Indicator of Economic Sentiment would have a positive value of 20. This is a bullish reading and suggests that financial experts see positive signs for growth in the medium term.
As it is a sentiment indicator, double digit readings are not uncommon. In 2018, for example, the ZEW Indicator of Economic Sentiment went from a positive reading of 20.4 to -25 over a span of seven months. During this time, German economic growth slowed from 2.2% in 2017 to 1.5%, but the impact on the ZEW Indicator of Economic Sentiment somewhat overstated the severity of this slowdown—as sentiment indicators are known to do.
The Data Behind the ZEW Indicator of Economic Sentiment
As mentioned, the ZEW Indicator of Economic Sentiment takes the aggregate of around 350 economists' and analysts' sentiments to get a sense of Germany's economic future. These experts come from banks, insurance companies and financial departments of selected corporations. They are asked about their expectations for the coming six-months, regarding the economy generally, inflation rates, interest rates, stock markets, exchange rates and oil prices.
In addition to the questions about the German economy, the ZEW Financial Market Survey covers the economic futures of several other countries and regions, including Japan, the United States, the eurozone, the UK, France and Italy.