ZEW Goes to War: ZEW Current Assessments Drop Sharply in March

The ZEW economic index for Germany fell more sharply in March than it ever had previously in its history. The German macroeconomic expectations index for March logged a -39.3 value after posting 54.3 in February; that change produces a net decline in the index of 93.6 points for the month. The U.S. expectations index also weakened, from 13.1 in February to -26.1 in March, a lesser but serious step-back.

Germany is reeling under the sanctions that it imposed on Russia in combination with the war in Ukraine on its doorstep. These two events have shattered expectations and caused current conditions to weaken sharply. In Germany, the current conditions index which was -8.1 in February has backtracked to -21.4 in March; this compares to a U.S. current conditions index that was 46.2 in February and has backtracked to 31.7 in March. Clearly concerns about the war and conditions in Europe have hit the German economy much harder than the U.S. economy.

At the same time, inflation expectations have moved sharply higher in March. For the euro area, the reading was -35.1 in February, rising to 69.5 in March. The German index in February was at -37.5; that's moved sharply higher to plus 70.2 in March. In the U.S., the index moved from -36.2 in February to plus 50.6 in March. The war came and the sanctions have been imposed and these are turning the entire economic picture inside out and upside down. The ZEW index shows a combination of dramatic and benign changes.

Markets continue to trade- did they simply discount everything? We usually expect markets to be the litmus test of economic events. But strangely the impact on markets according to the ZEW experts has been muted - in the survey at least. Euro area short-term interest rate expectations were at 50.3 for February and they have eroded only slightly to 47.2 in March. For the U.S., short-term rate expectations of 88.7 in February have become 86.7 in March.

The impact on long-term rates sees the German index going from 74.2 in February to 76.5 in March whereas the U.S. index moves from 78.0 in February to 81.5 in March.

Stock market survey shows reduced expectations but not dramatically so. In the euro area the stock market expectation index moves from a survey value of 32.9 in February to 22.1 in March; in Germany it drops from 34.8 in February to 21.4 in March; in the U.S. it barely budges moving from 28.5 in February to 27.3 in March. Of course, the stock market standings all are weak.

Summary Table: Stronger vs. Weaker The summary table show the economic situation weakening in the euro area, Germany, and the U.S. in March. Economic expectations weaken in Germany and the U.S. in March. Inflation expectations rise across the board for the euro area, Germany, and the U.S. Short-term rate expectations are slightly weaker in the euro area and the U.S. while long rate expectations are slightly stronger. For stocks, assessments are slightly weaker but not very dramatically. The survey shows dramatic shifts in economic variables and slight wiggles in market gauges.

Summary Table: Standings The summary table shows queue percentile standings for the economic situation in the euro area, Germany, and the U.S.: all below the 50% mark meaning they're all below their medians. Economic expectations have been crushed: they stand at their five-percentile mark for Germany, and 15-percentile for the U.S. Meanwhile, inflation expectations have shifted and soared to their 95th percentile and higher in the euro area and Germany; they settle at the 66th percentile area for U.S. Short-term and long-term rate expectations remain high with 80th to 90th percentile standings. And stock market percentile standings are 13% in the euro area, 9% for Germany but still near their median at 48.6% in the U.S.

Outlook as the world turns and the Fed meets Clearly war and Ukraine-related sanctions on Russia have had an enormous impact on people's expectations about the economy. German foreign and economic policies are doing a 180-degree shift as it no longer can look at Russia as a 'country you can do business with.' These are dramatic numbers especially with the Fed meeting this week and widespread opinion that the Fed will raise rates and some who hold that the Fed should raise rates sharply. It now seems clear with the new economic numbers this week and this awful survey from ZEW, we're not going to see the Fed raising rates aggressively. The new economic background seems to put the Fed on a 25-basis point per meeting path and we'll see how long they stay on it. That's going to depend upon how the global economy develops and particularly how the U.S. economy responds. For now, there's a great deal of uncertainty about all of those things. But the ZEW survey has Europe getting hits very hard with lesser fallout for the U.S. Until everyone is worse off. That's war for you… In war the losers are double losers, but the winners are losers too.