What Is the ZEW Indicator of Economic Sentiment?

What Is the ZEW Indicator of Economic Sentiment?

Let me explain the ZEW Indicator of Economic Sentiment directly to you—it's a sentiment indicator derived from the monthly ZEW Financial Market Survey, which aggregates the views of around 350 economists and analysts on Germany's medium-term economic future.

ZEW stands for Zentrum für Europäische Wirtschaftsforschung, or the Center for European Economic Research in English.

Key Takeaways

This indicator captures overall expert opinions on where the German economy is headed in the next six months. It's built from a monthly survey of up to 350 analysts, financial professionals, and other experts. You should know that sentiment indicators, whether from experts or the public, are commonly used to spot economic trends, drawing on various theories and the idea of crowd wisdom. While the ZEW Financial Market Survey touches on several sectors and regions, only the Germany-specific questions feed into this indicator.

Understanding the ZEW Indicator of Economic Sentiment

The broader ZEW Financial Market Survey covers various areas, sectors, and regions, but for the ZEW Indicator of Economic Sentiment, we only use the parts focused on the German economy. The indicator itself is straightforward—it's the difference between the percentage of analysts who are bullish on Germany and those who are bearish.

If the reading is a negative percentage, that means most analysts are bearish. A positive reading indicates the majority is bullish. For example, if 20% expect deterioration, 50% expect improvement, and 30% see no change, the indicator comes out at a positive 30, which is bullish and points to positive growth signs in the medium term.

Double-digit readings are normal for sentiment indicators like this. Take 2018, when the ZEW Indicator dropped from +20.4 to -25 over seven months; during that period, German growth slowed from 2.2% in 2017 to 1.5%, but the indicator exaggerated the slowdown, as sentiment measures often do.

Sentiment Indicators

Sentiment indicators are a standard way to gauge and predict economic and market trends. Different economic theories back them up, even if those theories clash on other points. For instance, Keynesian economics highlights how irrational investor and consumer psychology can drive recessions and cycles. On the other hand, rational expectations theory assumes people use all available info and a solid grasp of the economy to form accurate predictions.

Types of Indicators

These indicators typically come from surveys asking about opinions or future intentions among different economic groups. They're designed to tap into the wisdom of crowds—individuals can be wrong, but averaging a large group's views pulls in more information and tends to be more accurate. Surveyed groups might include investors, CEOs, supply chain managers, small business owners, bank officers, or consumers. A consumer sentiment survey could ask if people feel optimistic about the economy and if they plan big purchases soon.

Some indicators target key players like consumers and investors who directly influence markets, while others, like the ZEW Indicator, focus on experts who should have superior insights into upcoming trends.

The Data Behind the ZEW Indicator of Economic Sentiment

This indicator aggregates sentiments from about 350 economists and analysts from banks, insurance companies, and corporate finance departments. They're queried on their six-month expectations for the general economy, inflation, interest rates, stock markets, exchange rates, and oil prices.

What's the Difference Between Bullish and Bearish in Trading?

In trading, bullish means you believe market prices will rise, while bearish means you think they'll fall. A bear market is a 20% or more price drop, and a bull market is a 20% recovery.

How Is the ZEW Index Calculated?

The index is the percentage of optimistic experts minus the percentage of pessimistic ones regarding Germany's economy over the next six months.

How Can an Investor Use a Sentiment Indicator?

These indicators give you a snapshot of how a group feels about economic data. They're not definitive guides for actions but work best to confirm trends when combined with other factors in your buy/sell decisions.

The Bottom Line

The ZEW Indicator measures expert opinions on the German economy through a monthly survey of up to 350 professionals like analysts and financial experts—it's a tool for gauging economic trends. The full ZEW Financial Market Survey also covers economic futures for places like Japan, the US, the eurozone, the UK, France, and Italy, beyond just Germany.