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ZEW Indicator of Economic Sentiment

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The ZEW Indicator of Economic Sentiment is a basic gauge of how people feel about the economy. It comes from a monthly survey called the ZEW Financial Market Survey. Around 350 economists and analysts share their views on how they think Germany’s economy will do in the coming months. 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 looks at various areas and regions, but only the questions about the German economy are used for the ZEW Indicator of Economic Sentiment. It shows whether experts are optimistic or pessimistic about Germany’s economy.

Here’s how it works: If more analysts are positive about the economy, the indicator shows a positive number. If more are negative, it shows a negative number.

For instance, if 20% of experts think the German economy will get worse, 30% think it will stay the same, and 50% believe it will improve, the indicator would be +20. This suggests optimism for future growth.

The indicator can swing widely. In 2018, for instance, it went from +20.4 to -25 in seven months. Although German economic growth slowed during this time, the indicator’s drop may have exaggerated the slowdown’s severity, which sentiment indicators tend to do.

Sentiment Indicators

Economic sentiment indicators are tools used to understand and predict trends in the economy and markets. Different economic theories support these indicators, even if they have different ideas about how the economy works.

One theory, called Keynesian economics, focuses on how people’s feelings and behaviors, which may not always make sense, can lead to economic ups and downs. Another theory, called rational expectations theory, says that people in the market use all the information they have to guess what will happen in the future.

These indicators often come from surveys that ask people what they think about the economy and what they plan to do in the future. By asking lots of people, these surveys try to tap into the collective knowledge of the crowd. Even though individuals might be wrong sometimes, the average opinion of many people usually gives a better picture of what’s going on.

Different groups of people get surveyed, like investors, CEOs, managers who handle supplies, small business owners, bank officers who give loans, and regular consumers. For instance, a consumer sentiment survey might ask people if they feel positive about the economy and if they’re planning to buy big things in the next six months. Some surveys target people who directly affect the markets, like consumers and investors. Others, like the ZEW Index of Economic Sentiment, focus on experts who are supposed to know a lot about where the economy is headed.

The Data Behind the ZEW Indicator of Economic Sentiment

The ZEW Economic Sentiment Indicator gathers opinions from about 350 economists and analysts to understand how Germany’s economy might do in the future. These experts work in banks, insurance companies, and financial departments of some big businesses. They’re asked about what they think will happen in the next six months, like how the economy will do, how prices might change, how interest rates will move, how stocks will perform, and how currency exchange rates and oil prices might go.

The Indicator works like this: It calculates the difference between the percentage of experts who feel positive about Germany’s economy in the next six months and those who feel negative.

Besides asking about Germany, the ZEW survey also looks into what experts think about the future economies of other countries and regions, such as Japan, the United States, the eurozone, the UK, France, and Italy.

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