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Economy in Brief

German Current and Expectations Readings Converge by Moving in Opposite Directions
by Robert Brusca  August 10, 2021

The ZEW survey for Germany finds an improvement in current conditions and a degradation for expectations. In August the current index moved up to 29.3 from 21.9 in July. The expectations index fell sharply in August to 40.4 from 63.3 in July.

In making these movements, the high standing for expectations eroded sharply while the moderate standing for the current evaluation improved. The current index is now well above its median as it has been stronger than its August value only 43.6% of the time. Expectations are still relatively stronger than the current index, but expectations fell from a position in which they had been stronger only 10% of the time to a position this month in which they have been stronger 29.6% of the time- more than one quarter of the time.

The German current reading is still in the normal range slightly above its median. While expectations are elevated, the elevation is not as extreme or strong as before. The recirculation of the virus is the cause of this step back in expectations. By comparison in August of one year ago, expectations were on the moon as they had been higher historically only 2.9% of the time then. That, in part, was because of the weakness in the current index which had been stronger at that time 88.6% of the time. So both of these indexes are coming from readings year ago that were extremes and both are moving more toward the middle of the pack now.

Table 1

The ZEW experts still provide some international forecasts, but they have much reduced their scope of coverage. The table below provides a quick overview of salient trends.

Table 2

The momentum assessment table (Table 3) shows stronger economic situations in the euro area Germany and in the United States in August as economic expectations weakened in the U.S. and in Germany. Despite inflation flaring, it is seen as weaker ahead in the euro area, Germany and in the U.S. The ZEW financial experts are drinking the Central Banker’s Kool Aid. In addition, the U.S. flags a red reading in the table which means the diffusion index on top of weakening is below 50%. Short rates are expected weaker in the EMU and stronger in the U.S. although in the U.S. the current diffusion index is showing a queue standing value below 50%. That puts it below its historic median value. Long rates are losing momentum in Germany as well as in the U.S. Stock values are expected to strengthen in Europe, Germany, and the U.S. However, for now the diffusion values in the EU and Germany are still below 50% which means they are rising after a below median momentum. That’s not exactly rolling thunder.

Table 3

Returning to Table 2 for the specifics instead of the general trends, we find similar standings for the economic situation and for expectations between the U.S. and Germany. However, inflation worries are much higher in the EMU and Germany than in the U.S. where inflation rates already are far elevated above the European levels. Short rate expectations have diffusion values that are very low and rankings that put them close their medians while longer term expectations see similar sorts of increases in Germany and the U.S. that rank the increases above normal near the two-thirds mark. Stock markets have low modest diffusion values and rankings that put the EMU and German markets just below average gains while in the U.S. with the same sort of diffusion level points to larger than normal gains.

The Big News on changes month-to-month is that both inflation and economic expectations were pared back sharply and that in response there was a small reduction in the diffusion index for long rates.

Covid continues to drive the outlook with manifestations for the oil market as well. It is a degraded outlook on the month, but ZEW experts are not giving up on the notion of transient inflation- at least in the U.S. Closer to home, however, they seem to have greater concerns.

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