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Economy in Brief

Macro Situation Eases Slightly Across the Board
by Robert Brusca  November 24, 2021

Zew financial experts this month saw a pronounced easing in the current macro situation. The average deterioration for the US, Germany, and the EMU is a drop of 4.2 points month-to-month, but the German assessment fell by 9.1 points the EMU reading fell by 4.3 points and the US assessment improved by less than one-point.

The macro-economic situation expected ahead deteriorated slightly for the US, but it jumped ahead by 9.4 points for Germany.

Meanwhile, inflation has progressed so virulently that it is now given a net negative reading in the expectations survey's diffusion data. This the first time we have seen this in a while (since May or June of 2020). The development is not so clearly good news although it may seem so. I say that because it is an acknowledgement that inflation has risen so high that it is now likely to fall in the period ahead. It is not clear if this (net negative diffusion) reading owes more to the expectation of inflation falling or to the result of inflation having risen so high that it is ‘bound to fall.' But it does set an expectation for incoming reductions in the rate of inflation. In the Euro Area the October expectation of +17.1 has turned to -14.3 in November; the German 14.8 reading in October has become -19.8 in November and the US reading has dropped on that span from +16.2 to -10.6 in November.

You begin to appreciate the dilemma of what falling inflation expectations mean when you notice that short term interest rate expectations in the Euro Area are higher on the month at +12.7 (a rise of less than one diffusion point) and in the US the diffusion reading is up to 44.7 ( a rise of 6 ½ diffusion points). That makes it look lie inflation expectation are lower mostly because inflation has risen so high that further gains are unlikely.

And with this combination of events the longer-term inflation expectations would seem to be lower in both Germany and in the US with a 12.4-point diffusion drop in Germany and a 7.1-point diffusion point drop in the US for long term interest rates. For the Zew financial experts long term inflation expectations do not seem to have risen. Equity market expectations have rising in EMU, Germany, and for the US, with monthly gains of approximately 10 diffusion points across the board.

The summary table (above) shows average (unweighted) changes for the three economic units (Germany, EMU, and the US) as well as the percentile standings for each members' underlying diffusion reading. The percentile standings, of course, are quite distinct from the monthly changes. They tell us where the raw diffusion index stands relative to its historic queue of data.

Diffusion standings

For the economic situation, the Euro Area has the strongest standing in its 76th percentile compared to the US and Germany in their low 60th percentiles. Any reading above the 50% mark is a reading above its historic median value. So, all of these are above median readings- still not very strong. Economic expectation diffusion readings are established in their 50th percentile range for the US and for Germany. These are above-median values but not very strong. Expected inflation values have low standings, in the bottom 20% of their respective queue of data, for EMU, Germany and the US. This is a weak result and wholly expected from the raw negative diffusion values. However, in marked contrast to inflation expected to be falling short term rates in the US and in EMU have mid-50th to mid-60th standings. These again are moderate readings but are above their respective medians and not high. Long-term rate assessments are actually higher with a 68.8 percentile standing in Germany and a more significant 83 percentile standing in the US. Markets may not have extremely elevated concerns about inflation, but long-term rates are relatively higher than any other variables for the US as well as for Germany. That is a mild cautionary observation. Stock market expectations that increased across the board have only boosted Germany and EMU to just below their historic median readings while the US remains upbeat with a moderate and positive 67.9 percentile standing for stocks.

Zew sum-up

On balance the report here is a mixed but centrist one. Zew financial experts see inflation as high but falling. They see interest rates as middling and yet above their medians with long rates further along that path being slightly more restrictive. In Germany and in EMU stock market expectations are returning to more normal levels while the US, in the wake of historically strong stock market readings, continues to look for above average performance. Zew experts are not overly complacent or worried about inflation. They see central banks roughly doing the right thing and that means that in their view moderate actions will be enough to keep growth flowing and inflation at bay.

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