Haver Analytics
Haver Analytics
Global| May 16 2023

Zew Macroeconomic Expectations Turn Lower

  • Economic expectations in Germany turned lower in May, with an up-minus-down net diffusion reading falling to -10.7 from +4.1 in April. The reading for the United States weakened as well to a reading of -29.6 in May from -23.3 in April. The deterioration in expectations comes, as inflation continues to linger high with central banks raising rates.

  • Current economic conditions are mixed in May. For the Euro-Area there was an improvement to -27.5 in May from -30.2 in April. Germany, however, shows deterioration to -34.8 from -32.5 in April. The US also shows deterioration, as its net reading swings from a + 4.1 net in April to a -3.4 diffusion marker in May.

Inflation expectations Central banks clearly are focused on inflation, as inflation continues to run over the top of their targets and even after substantial rate hikes inflation has not gone down by very much in the United States or in Europe, generally. And the Euro-Area inflation expectations are hardly changed at a -81.9 reading in May after a -82.5 in April. In Germany the reading is -80.4 in May compared to -81.2 in April. And, in the US, the reading is -82.9 from -84.1 in April. The readings reflect the fact that inflation is very high and that, at this point, inflation broadly is expected to slow. However, the monthly changes are extremely small.

Survey history for context Inflation expectations were high and positive through 2021. Toward the end of the year, they began to shift into negative territory, they flipped into positive readings in March and April of 2022, after the Federal Reserve in the US began to hike interest rates. Then, negative readings persisted in the -25% to -50% range through July, August, September, October, and November of 2022. In December of 2022 there was a shift as inflation expectations in the US and in Europe turned sharply to higher negative values in high -70s or in the -80-percentile range. The readings have stayed there with very little change for the last six-months. During this period inflation in the US has peaked and the headline has come down while core inflation rates in the US have been very stuck; the Euro-Area inflation rate also has peaked and started to come down except in France. The UK shows very stubborn inflation that doesn't show signs of decelerating. The Zew inflation expectations data have become hard to interpret because the high negative numbers indicate that inflation is not expected to accelerate but is expected -strongly expected- to fall; that's not a surprise given how high inflation is. The question is how much deceleration they expect from inflation; high negative readings suggest ‘a lot.’ But the survey has had high negative readings for the last 6-months; they've had these high expectations for inflation to fall and they simply have not been met.

The interest rate outlook Interest rate expectations also tell us something about what's expected from inflation in the Euro-Area. Short term expectations are higher in May at 75.6 up from 68.5 in April- further rate hiking is expected in the Euro-area. In the United States, however, a reduction in short term expectations progresses somewhat steadily although the fall; in May it is considerably more dramatic falling to a level of 19.3 from 44.7 in April. In this case there seems to be an association between interest rate expectations and the banking sector crisis that has emerged. There continues to be uncertainty about how much that is going to affect inflation in the US, but rate expectations have shifted dramatically as the banking sector crisis has emerged. That's even as the Fed has vowed to return inflation to its 2% target and asserted that the banking sector is safe as well as promise to deliver no undue harm to the economy – a tall set of orders.

Long term expectations find slightly slower rates in Germany the level of 18.6 in May down from 21.8 in April and, in the US, long term rates are lower as well with their diffusion reading down to 2.8 in May after a reading of 9.2 and April; that itself is down from 18.6 in March. Once again, we're picking up the impact of the crisis in the US on the rate outlook.

Stocks outlook cut Expectations for the stock markets (not shown) are weaker for the Euro-Area, for Germany, and for the US - all of which have turned negative from positive readings in the mid-teens in April.

Complicated situation On balance it's a complicated picture. There are differences between Europe and the US and there are also some significant differences in the progress of expectations and the perception of events that are linked to causes that we can't clearly identify. For example, if people are just concerned about the banking sector and determined that the Fed will not raise rates anymore are there also expectations that piggyback on that about inflation being lower. Will the the banking sector crisis do that? It's hard to know what the message is in markets.

The queue standings are unambiguous and weak The queue standings that evaluate the diffusion readings relative to historical standards show that the economic situation is substandard in the Euro-Area, Germany and in the US with queue percentile standings below the 50% mark (50% identifies the median over a span of time back to the early 1990s). Expectations for growth are even weaker with an 18-percentile queue standing for Germany and a 14-percentile queue standing for the US. Inflation expectations, as noted above, are extremely low at the 1.2-percentilelevel for the Euro-Area, at 2.5% for Germany and at 1.1% in the United States. The Zew experts get a expect inflation to decelerate rather than accelerate but the key question here is how soon and by how much? We don't get too much guidance on that. Short term rate expectations in the Euro-Area are still much higher at an 87.7-percentile standing and lower in the US at a 37.3-percentile standing. The Federal Reserve has done a lot more rate hiking than the ECB has and given the prospects for growth there's relatively more anticipation that short term rates can be cut in the US. The short-term US rate expectations have been lowered sharply over the last two months. Long-term rate expectations are well below their medians for both Germany and the US at a 25-percentile queue standing in Germany and a 10-percentile queue standing in the US. Long-term rates are expected to continue to fall. Stock market assessments have them extremely weak in the Euro-Area and in Germany and weak but not quite as weak in the United States as well.

Summing up On balance this is not very upbeat outlook. Inflation remains stuck and we see inflation expectations continue to look for inflation to become unstuck and to fall but we've been hearing that broken record for about half a year from the Zew experts. Expectations for growth are weak as well. The perceptions for current growth are not quite as weak but they show growth is substandard and has been weakening. The clearest expectations are for interest rates: long-term rates are falling. And short-term rates will be moving in different directions, higher in the Euro-Area and lower in the US. Investors continue to worry about recession both in the US and in Europe. And inflation remains stuck with unclear prospects as to how central banks intend to act in the future. Central bankers all talk the talk but it's not clear if they're willing to walk the walk. Only time will tell.

  • Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media.   Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.

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