The ZEW measure of economic sentiment among analysts and institutional investors regarding the economic outlook six months ahead fell from -22.2%in September to -27.4% in October, that is, the pessimists outweighed the optimists by 27.4%. This is the lowest value since March 1993. In October of last year, the optimists outweighed the pessimists by 39.4%.

At the same time, among the participants in the survey, those who appraised the current situation positively outweighed those who appraised it negatively by 42.9%, the highest value since October 2000. The October value was up from 38.9% in September and from -58.0% in October of 2005. The first chart compares the views of the ZEW participants on the current situation and the outlook six months ahead.

The rapid and sustained rise in the appraisal of current conditions reflects the surprising strength of the German economy in the current year. The Economic Minister, Michael Glos, recently said that the ministry will raise its estimate of 2006 growth to 2.5% from 1.6% estimated last April. It is not surprising, therefore, that investors view the future with some caution. This is especially true given the inevitability of tax increases on January 1, 2007 that are likely to dampen consumer spending. The VAT (value added tax) is scheduled to rise from 16% to 19% and social security contributions will also increase.

The other major indicator of sentiment in Germany is the IFO measure to be released October 25th. The ZEW measure is based on a small sample--some 300 participants--and represents the opinions of the financial community. The IFO measure is based on a much broader sample--some 7000 participants--and represents the opinions of businessmen engaged in manufacturing, construction, wholesale and retail trade. In the appraisal of the current situation, the two surveys reveal similar views, although the views of the financial community tend to be more volatile than those of the industrialists and trades people. The second chart compares the appraisal of the current situation by the two institutes. The correlation between the two series is fairly high .83.

In the appraisal of the outlook, there is less agreement in the views of the two sectors, represented by a lower correlation--.67--and again, the views of the financial community tend to be more volatile than those of the industrialists and trades people.The third chart compares the views on the outlook of both groups.