Continued strength of the euro and now fears of recession in the United States are taking their toll on the confidence of German institutional investors and financial analysts as shown by the ZEW's (Center for European Research at Mannheim) Indicator of Economic Sentiment. The indicator measures the percent difference between those who expect improvement and those who expect a deterioration in the six months' outlook and current conditions.

The excess of pessimists over optimists regarding the outlook for the next six months rose 4.4 points to 41.6% in January from 37.2% in December and is now at the lowest point since the early nineties. The excess of optimists over pessimists regarding current conditions declined 6.9 points to 56.6% from 63.5% in December. This suggests that, although they are losing confidence in the current conditions, the financial community still believes that current conditions in Germany are much better than they have been in some time. The ZEW indicators for the six months' outlook and current conditions are shown in the first chart.

In addition to its Indicator of Economic Sentiment, the ZEW also publishes its participants' profit expectations for the next six months for selected
industries. These profit expectations give some insight into the specific concerns underlying the general pessimism of the participants. In the latest survey, for example, participants expected some of the biggest declines in profits in the vehicle (automotive), machinery and chemicals/pharmaceuticals industries--all dependent on overseas demand that is threatened by the strong euro and consumption and trade, dependent on the German consumer, whose propensity to consume remains lackluster. Profit expectations in these industries are shown in the second chart.

Participants in the January survey apparently expected some slight improvement in the profits of the depressed financial and insurance sectors and in the volatile construction industry. The only industry where profit expectations increased in the month and were above January 2007 was the service industry. The improvement in profit expectations in these four industries, shown in the third chart, was not large enough to offset the deterioration in the profit expectations in the other industries.