ZEW Experts Run Scared

The ZEW survey for April shows some stunning changes and deterioration. It's important to point out that this survey is a survey of German financial experts and Europeans are having a particularly difficult time with the U.S. policy and the threat of putting tariffs on them and globally. The extent to which ZEW expectations have been cut is generally excessive compared to the behavior in the U.S. and the behavior of financial markets although those have also been volatile and have shown a great deal of concern.

ZEW experts in April see the EMU economic situation eroding to a -50.9 reading from -45.2 in March, a minor step back. For Germany, there's an improvement to -81.2 in April from -87.6 in March. For the United States, there's an astonishing markdown in the economic situation from +6.7 in March to -23.9 in April. The U.S. reading had been as high as 42.6 in February; this is a remarkable change in the economic situation.

In three months, macroeconomics expectations in Germany have moved from a +51.6 in March to a -14 in April. In the United States, a reading of -48.7 in March has gone to -71.5 in April, the worst assessment on record.

Inflation expectations in the euro area deteriorate from +6 in March to -3.1 in April. For Germany, inflation expectations move from +7.9 in March to -5.0 in April. For the U.S., inflation expectations move in the opposite direction: they get higher moving from a 52.3 in March to 75.8 in April; this pushes them up to a 96.7 percentile standing and compares to a 27.7 percentile standing for Germany and a similar standing for the euro area. A lot of the analysis that we have seen has talked about relatively minor changes in inflation over the short one when the tariffs will push the price level up without any clear view of how much lasting inflation effect there might be. The ZEW experts take a very different view that the tariffs are going to wildly change the inflationary environment.

Short-term interest rate expectations fall in euro area to -60.8 in April from -56.1 in March. For the U.S., the expectations are little changed at a -22 reading.

Long-term interest rates move in different directions with the German long-term rate response moving from a 35.7 assessment in March to a 23.3 assessment in April; for the U.S., the March reading of 34.7 moves up significantly to 48.5 in April, a 52.6 percentile standing.

ZEW expectations for the stock market show a slight downgrade for Europe in April, an upgrade for Germany, and weaker conditions for the U.S. Comparing these levels to what they were looking for in February, the German level moves to 9.7 in April from -4.7 in February. The euro area moves to 6.4 from -0.8 in February. The U.S. outlook moves to -17.6 from +12.1 in February. The exchange rate moves sharply, too. The dollar is at a reading of -35.4 in April, down from -17.2 and March; that compares to a reading of +27.5 in February.

Summing up Clearly, Europeans and the ZEW experts put a great deal of emphasis on international trade and on exchange rates. European countries are much more sensitive and trade dependent. In Germany, exports plus imports are nearly 100% of GDP, so it's not surprising that they feel a great deal of sensitivity to trade. The U.S. sensitivity to trade is much less than theirs. Yet, their assessments have most of the impact occurring on the U.S. economy and not on their economies and so that's a caveat in terms of thinking about these results. ZEW experts clearly are thinking that because the U.S. is doing this the U.S. is going to get the worst of whatever blowback there is from having tariffs in place. But an assessment of the data does not seem to align with that expectation.