ZEW Eco-situation Readings Ease While Expectations Merely Flounder

ZEW Overview The ZEW economic index weakened for the current situation in June, worsening for the euro area, for Germany, and for the USA. On the other hand, economic expectations improved slightly, but the emphasis here is on ‘slightly’ as economic expectations for Germany and the U.S. remain quite weak and depressed.

• Inflation expectations continued to post large net negative readings. Inflation rates continue to run high in the euro area, in Germany, and in the U.S. with a few ZEW experts thinking the conditions could worsen from where they are as central banks raise rates.

• Short-term rate expectations, on the other hand, are slightly weaker than they were in May. In the euro area, expectations have a ranking in their 86th percentile, reflecting the fact that the ECB is much farther behind raising rates relative to its inflation target. In the U.S., the short-term rate expectation index has only a 35.6 percentile ranking because the Federal Reserve has already raised rates substantially and there is, in the U.S., an ongoing to debate about whether the Fed is going to pause at the meeting this week, and then possibly continue to raise rates, whether it will raise rates at the meeting itself, or exactly where Federal Reserve policy stands. This uncertainty and ambivalence is reflected in this ZEW survey values.

• Long-term rate expectations are weaker in both Germany and the U.S.; both have fallen significantly in June compared to May acknowledging that inflation progress is detectable and that long-term interest rate investors may feel less at risk to what lies ahead.

• Stock market assessments of the euro area, Germany, and the U.S. all improved and all switched from a net negative reading in May to a net positive reading in June. But all the queue percentile standings remain extremely weak. The U.S. standing at nearly its 20th percentile is the strongest of the lot, a reading that itself is still quite weak.

The economic situation for the euro area has a diffusion reading that's substantially negative; the German reading is also substantially negative and stands at a lower negative number than for the euro area itself. However, the euro area has a weaker percentile standing at its 37th percentile compared to Germany that has approximately a 30-percentile standing. The U.S., with merely a -5.5 net negative diffusion reading, has a 32-percentile queue standing, even weaker than Germany’s. This points out that different countries have different experiences in terms of how the ZEW experts will assess their prospects and it's why the net diffusion scores themselves have more validity when looked at as a time series on one jurisdiction than as a cross section (this is what the queue standing accomplish).

Macroeconomic expectations are another example of this phenomenon. The U.S. has a net diffusion reading in June of -24 while Germany has a net reading of -8.5; yet, the German standing is very similar to the U.S. standing: Germany has a 19.2 percentile queue standing while the U.S. has a slightly weaker 18.6 percentile standing.

Inflation expectations remain very low, and they moved even lower over three months compared to 12 months. Their queue percentile standings are extremely low, in the zero to 0.5% range, indicating that inflation actually is already so high that the ZEW experts don't anticipate acceleration to be likely.

Short-term interest rate expectations have been very stable in the last two months for the euro area and for the U.S. U.S. expectations for short-term rates fell sharply in May compared to April while in the European Monetary Union short-term rate expectations rose in May compared to April. The U.S. is much farther along its rate hiking path and that is reflected in the queue standings referred to above.

Long-term rate expectations have continued to move lower somewhat steadily; we see it in the 12-month to 6-month to 3-month changes for Germany and for the U.S. as well as in the monthly data. The queue percentile standings for long-term interest rates are below their 20th percentile for both Germany and the U.S. and even much weaker in that range for the U.S.

Summing up On balance, the ZEW survey seems to capture most of the salient features of the U.S., Germany, and EMU economies, as economies where central banks have been moving interest rates up at different speeds, areas that have inflation as an issue, areas that are seeing economic weakness, and areas for which the economic expectations are still quite damped. The ZEW experts seem to reflect the same sorts of uncertainty that we've been seeing for a while and uncertainty is now characteristic among all economists. There is uncertainty about how fast inflation will fall and uncertainty about how growth is going to progress. There is uncertainty about how high rates will have to rise to produce an acceptable inflation outcome- and this is after central banks have tolerated above-target inflation for what is already a considerable period. Economic surveys are somewhat interesting to look at, but no group of analysts has insight into the future – especially in this cycle. In my view, the most important thing in this survey is really the assessments of current conditions since views of the future at this point are completely speculative. It may also to be interesting to observe what people are thinking. But it can be difficult to understand what another person means by his or her own expectation profile. As we note above, raw diffusion readings can be much different than their rankings across countries that cast doubt on the meaning of cross-country comparisons, let alone mind-reading.