Zew Expectations are Beaten Back Again

The Zew experts' assessments of the global economy have taken a set-back in June. The set-back is broad in nature across countries/regions and across the surveyed gauges that the Zew experts assess. After some stabilization the current assessment is weakening again. Macroeconomic expectations that had hit lows around the turn of the year for many of the surveyed countries are now back at readings of extreme weakness but only Japan has a new low in its Zew assessment on this horizon. Inflation expectations are low and generally fell sharply for members in June compared to May. Italy and the UK show a small decline in inflation expectations between the two months. For the group inflation expectations have fallen by more month-to-month only 17% of the time. For the US inflation expectations have fallen by more only 6% of the time back to 1992. For Japan inflation expectations have been cut month-to-month by more only 10.3% of the time, for Germany, the percentage is 17.6%.

Assessments are changing broadly. Mario Draghi unexpectedly threw down the gauntlet today saying that if European inflation did not rise, the ECB would begin taking steps for stimulus. This pronouncement by "Super Mario" or "Whatever it takes Mario" was taken at face value and it helped to drive stocks higher, bond yields lower and it weakened the euro. The Zew survey has already seen a reduction in interest rate expectations among Zew prognosticators with the US undergoing an extremely sharp reduction in short term rate expectations and the ECB seeing a significant reduction as well. Declines in expectations also were logged for Italy and for the UK, with Brexit still a factor in the UK assessments. Long terms rate expectations by Zew members fell across the board. With those changes in hand stock market assessments took a beating, falling to their lower 5 percentile standing for all countries and below their lower 1% standing for all except the US.

The table above helps to organize the various moving pieces of the Zew participants' assessments and outlook. The table presents percentage standing data that reflect the percentile standings of the Zew survey results this month. The average survey result for each category is contained in a panel near the bottom on the table showing the average in June the average one month ago and the change this month. At the very bottom line of the table, I present the average standing for all the values in the table's top panel as a summary statistic.

The average index change shows that monthly assessments were cut across the board in each category. The economic situation eroded just bit month-to-month but economic expectations, short rate expectations, long rate expectations and stock market expectations all fell double digits in terms of their average month-to-month survey assessment. Inflation expectations fell by a significant 7 points on average held down by small changes in the UK and Italy against a very large deterioration in the US.

Mario Draghi's remarks today dove-tail well with the new Zew survey that seems to echo Mr Draghi's concerns. Draghi's comments have caused the Euro to fall and that has raised one thing, the ire of US President Trump who accuses Europe of beggar-thy-neighbor policies. But that simply shows the President's misunderstanding of events. He is right about the impact on competitiveness which is his singular focus at the moment. But he is wrong to stew over it since markets have to move to reflect events and this is hardly a currency ‘manipulation event.' Still, it's an example of where we are in international policy. The US President is a bit of bull in china shop trying in one fell swoop to retrieve competitiveness lost by decades of poorly designed US policy and trying to reverse bad practices by US trade partners that have been tolerated for too long.

The "good news" on the day is that Trump as Xi are scheduled to meet soon at the G20 summit. However, we will not know until after that meeting whether that is truly good news or not. For now it is a potentially positive development.