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Economy in Brief

ZEW Experts Still See Depressed Conditions and Harbor Weak Expectations
by Robert Brusca  August 16, 2022

The overview table shows that the current situation in the eyes of the ZEW experts strengthened in August in the U.S. and the U.K. but weakened in Germany. Expectations for the U.S. firmed, but expectations for Germany weakened. Inflation expectations for the U.S. weakened, but they strengthened for Germany and the euro area. Short-rate expectations strengthened for both the euro area and for the U.S. Long-term rate expectations rose for both Germany and the U.S. ZEW experts, looking at currently weak stock market indices, saw them strengthening in the euro area, Germany, and the U.S. They look for the dollar to continue to strengthen versus the euro. That's the summary of the month-to-month changes in this month’s survey.

Economic conditions and expectations
The ZEW experts see the economic situation as weak in the euro area, Germany, and the U.S. All these jurisdictions have economic situations that rank below their 40th percentile marking them as weaker than their respective medians (since the median occurs at the 50th percentile). Economic expectations for Germany are this week or weaker 1.4% of the time- very rarely. In the U.S., economic expectations are this weak or weaker less than 10% of the time- also rarely.

Table 1: Summary of Month-to-Month Shifts

Inflation expectations
Inflation expectations are low for euro area, Germany, and the U.S. These ratings reflect the expectation that inflation is not going to accelerate from its current high pace. They do not reflect the expectation that inflation will be low. The U.S. has the lowest inflation expectation at under a 1% standing; Germany and the euro area have inflation expectations below their respective 20th percentiles. For all jurisdictions, the expectation that inflation is going to dissipate is relatively strong.

Central bank actions implied
Part of the reason for the expectation that inflation will not be accelerating is the expectation that short-term interest rates will be higher. This is an extremely strong expectation in the euro area and the U.S. with percentile standings in the top ten percentile of where they have been historically. In the euro area, expectations for higher short-term rates have been higher only 1.6% of the time. The ECB has finally started moving rates up; the ZEW experts expect that to continue.

Equity markets
Stock market expectations are extremely low in August; they are lower only 1.6% of the time in Germany and only 3.9% of the time in the euro area. The U.S. has a stronger standing than those, but still a weak reading at the 35.8 percentile for stock expectations. With central banks tightening, inflation expected to be squeezed lower, poor economic conditions, and a weak outlook, the stock market expectation could not be anything other than weak. In this environment, the ZEW experts see the dollar continuing to strengthen against the euro.

Table 2: Readings and Standings

Summing up
The bottom line for this survey is that monthly conditions haven't changed very much from what they were last month or recently. Conditions continue to be poor; expectations continue to be weak, inflation is not expected to accelerate, but interest rates are expected to rise to combat the current high state of inflation across the survey area. There is little sense of change in this report. By and large the percentile standings speak of conditions in the countries and areas of the survey members that are impacted, distressed, wrought with inflation, and undergoing remedial policies that continue to make the outlook for investment difficult. Unfortunately, some of the readings are already so weak; it is hard to get a bead on whether the experts think that conditions are truly the same or getting worse. Once analysts push ‘downgrades’ to a certain level, it is hard to push them down further even if there is the ‘technically’ room to do so. Looking at the situation objectively, there are still a lot of risks and very little progress in addressing risks that have been evident for some time. Some of the geopolitical risks have worsened.

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