ZEW Indicator of Economic Sentiment

Posted on by user

ZEW Indicator of Economic Sentiment

What it is

The ZEW Indicator of Economic Sentiment measures expert expectations for Germany’s economy over the next six months. It is derived from the monthly ZEW Financial Market Survey, which polls roughly 350 economists, analysts, and financial professionals from banks, insurers, and corporations.

How the indicator is constructed

  • Respondents state whether they expect the German economy to improve, worsen, or stay the same over the next six months.
  • The indicator equals: (percentage optimistic) − (percentage pessimistic).
  • A positive reading means a majority expect improvement (bullish); a negative reading means a majority expect deterioration (bearish).

Example

If 50% expect improvement, 20% expect deterioration, and 30% expect no change:
* ZEW = 50% − 20% = +30 (a bullish reading).

What the indicator reflects and its limitations

  • It captures medium-term expectations based on expert sentiment, not current economic activity.
  • Sentiment indicators can move sharply and sometimes overstate the magnitude of economic changes. For example, the ZEW fell from +20.4 to −25 within seven months in 2018 amid a slowdown in growth, illustrating how sentiment can exaggerate short-term swings.
  • Use it as a gauge of expectations, not a definitive forecast.

Relation to other sentiment measures

  • Sentiment indicators rely on survey responses and the “wisdom of crowds.” They differ by the group surveyed (consumers, investors, managers, or experts).
  • Unlike consumer or investor sentiment indexes, the ZEW targets experts who may have specialized insight into future economic trends.

What the survey covers

Although the ZEW index focuses on Germany, the broader ZEW Financial Market Survey collects expert views on:
* Inflation and interest rates
* Stock and exchange rates
* Oil prices
* Economic prospects for other regions (e.g., eurozone, UK, U.S., Japan, France, Italy)

How investors and analysts use the ZEW Indicator

  • Confirm macroeconomic trends or shifts in market expectations.
  • Complement other economic data and indicators when forming investment views.
  • Not recommended as the sole basis for buy/sell decisions because it reflects sentiment rather than hard data.

Key takeaways

  • The ZEW Indicator measures expert expectations for Germany’s economy six months ahead.
  • It is calculated as the share optimistic minus the share pessimistic among ~350 respondents.
  • Positive values signal net optimism; negative values signal net pessimism.
  • Useful as a sentiment gauge but should be combined with other economic indicators.

Source

ZEW Financial Market Survey (Zentrum für Europäische Wirtschaftsforschung).