What are the ZEW indicators of economic sentiment?
The Economic Emotions ZEW Index is a simple sentiment index created from monthly ZEW financial market surveys. The ZEW Financial Market Survey is a compilation of the sentiments of about 350 economists and analysts about the future of Germany’s economy over the medium term. ZEW Zentrum für Europäische Wirtschafts forschung, This corresponds to the European Center for Economic Research.
- The ZEW Index of Economic Sentiment measures the overall opinion of experts on the direction of the German economy over the next six months.
- It is built on a monthly survey of up to 350 analysts, financial professionals, and other professionals.
- Indicators of popular expert opinion are widely used to measure economic trends based on various economic theories and crowd wisdom.
Understand the ZEW index of economic sentiment
The ZEW Financial Markets Survey covers many disciplines, sectors, and regions, but only questions specifically related to the German economy are used to develop ZEW indicators of economic sentiment. This data provides a simple indicator of the difference in the number of bullish and bearish analysts in the German economy. If the reading is a negative percentage, it means that the majority of analysts are bearish. If the reading is positive, it means that the majority are bullish.
For example, if 20% of respondents expect Germany’s economic situation to deteriorate, 30% to stay the same, and 50% to improve, the ZEW index for economic sentiment will be a positive value of 20. .. This is bullish. Reading suggests that financial professionals are seeing positive signs of medium-term growth.
Double-digit readings are not uncommon, as this is an emotional indicator. For example, in 2018, the ZEW index of economic sentiment went from 20.4 to -25 positive over the course of seven months. During this time, Germany’s economic growth slowed from 2.2% in 2017 to 1.5% in 2018, but the impact of ZEW on the economic sentiment index, as the sentiment index shows, is the severity of this slowdown. Somewhat exaggerated.
Economic sentiment indicators are a common means of measuring and predicting economic trends. Various economic theories support the use of such indicators, but otherwise they can be very opposed to those assumptions and conclusions.
These include Keynesian economics, which focuses on investor and consumer psychology as the (basically irrational) driving force of recession and business cycles, and all the associations generally available to market participants. An inaccurate understanding of the economic structure to efficiently form more or-reasonable expectations of future economic trends.
Emotional indicators usually take the form of a survey of opinions and intentions about future behavior and economic trends among people in different groups of the economy. By surveying a large number of people, emotional indicators are adjusted to harness the wisdom of the crowd. This is often misunderstood by individuals, but the average idea of many people is that they are more likely to aggregate more distributed information and become more accurate.
The groups surveyed may include investors, CEOs, supply chain managers, small business owners, bank lenders, or consumers. For example, a consumer sentiment survey might ask a consumer sample if they feel optimistic about the economy and if they plan to make high-value purchases within the next six months. Some indicators are targeted at key participants who drive the market directly, such as consumers and investors. It is also aimed at professionals who expect better than average insights into future economic trends, such as the ZEW Economic Feelings Index.
Data behind the ZEW indicator of economic sentiment
As mentioned earlier, the ZEW index of economic sentiment takes the sum of the sentiment of about 350 economists and analysts to understand the future of Germany’s economy. These professionals come from the finance departments of banks, insurance companies, and selected companies. They will be asked about expectations for the next six months regarding the economy in general, inflation, interest rates, stock markets, exchange rates and oil prices.
The index itself is calculated as the percentage of experts who are optimistic about the German economy over the next six months minus the percentage of pessimistic about the German economy during that period.
In addition to questions about the German economy, the ZEW Financial Markets Survey covers economic futures in several other countries and regions, including Japan, the United States, the Eurozone, the United Kingdom, France and Italy.