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Economy in Brief

German ZEW Index Shows Modest Improvement
by Robert Brusca  March 14, 2017

The German ZEW reading showed a modest improvement in expectations in March, rising to a reading of 12.8 from February's 10.4. However, it continues to reside below its median. Only the U.S. among countries in the table has an expectation reading above its median.

However, in terms of the current standing, Germany has the highest current reading according to its queue or rank standing. The German current index is higher less than 7% of the time. The U.S. index is higher less than 14% of the time. The euro area as a whole has been better some 22% of the time- all since January 1999.

The economic situation improved everywhere among countries in the table from February to March. Expectations improved in four countries with the U.S. and the U.K. showing retrograde motion. In the U.S., the Fed is getting ready for its second rate hike in three months while the U.K. is still grappling with as yet unknown consequences of Brexit.

Inflation expectations are so clearly hitched to the wagon of oil prices. As oil prices have been softening, inflation expectations have been moving lower. In March, expectations fell dramatically from February and February had seen levels fall substantially from January. On those timelines, oil price expectations also have moved lower.

Despite a great deal of policy anxiety in Europe as Germany worries more about inflation than the ECB, the ZEW experts have less inflation anxiety for Germany than for the EMU as a whole. Only Germany and Japan have inflation assessments below their respective medians since January 1999. The U.K. with weak Sterling on Brexit fears and the U.S. with the Fed hiking rates have the highest inflation queue standings in the table. Actually U.S. inflation is not accelerating that much at the moment if at all, but the Fed has been talking up the inflation risk and it is ready to hike rates again, probably as soon as tomorrow.

In a related report today, the EMU region reported its zone-wide index of industrial production which eased to a gain of just 0.6% over 12 months in January after logging a rise of 2.2% in December. Manufacturing output is lower by 0.2% over 12 months on a decline in output for capital goods and consumer goods. Intermediate goods output is higher over 12 months. China today reported some weaker retail sales as well as a slight bump up in the pace of its own industrial output.

Despite the strength we have seen in the PMI gauges (which are more topical), the traditional economic reports that count up things like the dollar value of retail sales or real output are showing a lot less strength than the diffusion indicators from Markit. This creates a point of confusion about how strong conditions really are. Diffusion indices are indicators of breadth. Traditional economic reports are indicators of strength. We are learning that while breadth maybe improving, strength is not such a clear cut case.

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