Germany’s ZEW Survey Sours

Germany’s ZEW survey has deteriorated sharply in September. The current index has fallen to -84.5 in September from -77.3 in August. The expectations index fell back to 3.6 from 19.2 in August. It had been as high as 41.8 as recently as July 2024. Conditions and expectations for Germany have taken a sharp turn for the worse over the last few months. The chart shows that expectations are much better than their depths of 2022. Their evolution from there has been erratic, but there has been a clear and strong rebound in expectations from those lows of 2022. However, there's also been significant vacillation and we're currently in a period in which the downdraft in expectations is relatively severe. Current conditions are amid quite different circumstance; they had some rebound from their 2022 lows which were still slightly higher than the 2020 lows that occurred during COVID. However, that rebound was not long lasting; in 2023 the current index had sunk substantially and although there was some minor rebound, we are now seeing current conditions making new lows and some of the lowest readings that we've seen since the brief COVID-caused recession.

The current index has been stronger than its current value 94% of the time, underscoring how extremely weak the current observation is. Expectations have been stronger about two-thirds of the time, a significant metric, but not as draconian as the reading for current conditions. However, in July expectations were strong enough that they had been weaker only about one quarter of the time. Both expectations and current conditions have taken a severe turn for the worse.

Meanwhile, central banks are on the easing path because they see this weakness globally – Japan, of course, excepted. We are expecting the Federal Reserve this week to reduce interest rates. The impetus for the Federal Reserve to reduce rates may be more pressing for its contribution to the international economy than for the U.S. itself, where current economic statistics show much more of an even-keeling set of results. Today's retail sales report in the U.S. was unremarkable although the U.S. industrial production index moved strongly higher and showed more strength than expected, adding some good news to what was an unexpected jump in the regional Empire State manufacturing index released yesterday. Nonetheless, these better reports are not expected to change the Fed's path, which is set to reduce rates probably by 25 basis points, expected to be announced on Wednesday.