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Economy in Brief

Potentially Disturbing Zew Readings...Are They Part Of A Broader Disturbing Trend?
by Robert Brusca  April 12, 2011

Zew's assessment of current conditions is flying high. But Zew expectations are moderate to low. Still with current conditions so good there is nothing to worry about, right? RIGHT? Answer me please...

Paint by numbers; get depressed by the painting - If we take things by the numbers, literally there is nothing reassuring about the current Zew readings for Germany this month. Historically the highest current conditions readings of the cycle came just months before the onset of recession in each of the last two German down-cycles (see the timing of the shading with current line's peaking). Recessions generally began with expectations just below zero and that gauge is relatively close to zero now (at +7.6). So based on the 'numbers' the German Zew index is not reassuring.

Current conditions numbers in action? - The bad news is that the current index cannot/does-not get much higher than its current value. It tops out at 100 and its current value is 87.1. While there are still about 13 points of value that the reading can yet climb, the current reading has only been higher than its current level three previous times (months!) in its history, or 1.7% of the time. On the other hand, there is some history of this index flattening out for a long period of time, dipping then hitting its cycle high.

Expectations do not reassure - The expectations index is at the 46th percentile of its high-low range in April so it is below its midpoint The index is higher than its current level 70.4% of the time, that compares to being higher than its March level only 64% of the time (at a reading of 14.1 in March instead of 7.6 in April). One year ago expectations were so strong that they were higher only 33% of the time. So the expectations index has been very high in this cycle and now it is cruising into territory where it does not frequently stay (it is 'here' or lower some 30% of the time only). However, we can take some consolation from the fact that his has dipped below the zero mark in the past without that being an immediate recession signal for Germany. A negative value for expectations is more like a necessary than a sufficient condition.

At the same we are seeing the ECB hike rates. Japan has admitted that its disasters are doing more damage to the economy than it originally thought. The IMF has downgraded the US recovery slightly and has urged the Fed to remain accommodative. This is not what a lot of the pundits in the US are calling for and increasingly it seems that there are Fed District bank presidents that are not on the same page with the IMF.

The IMF also sees markets as 'apprehensive' about counties in the euro area that might remain under market pressure. While Germany has been an island of strength in a Zone of question marks, the Zew index is now beginning to challenge that long-held assumption of never-ending growth. On top of that, the UK is showing some extreme weakness in its money supply even as its inflation rages ahead, well beyond any limits of tolerance that the ECB would have. Recently UK statistics have shown some weakness with the BRC 'same store' index embodying a very sharp reduction in retail sales volumes. Just within the last week I sounded the alarm on prospects for the continuance of the UK expansion. Risk seems to be mounting there. The risks to growth go out beyond Germany and it should be worrisome to seeing 'the strongman of Europe' show a weak side.

We are aware of the risks elsewhere in Europe. Weakness, still, is not baked in the cake, but it is a risk and policymakers should be sure that they do not run rough-shod over that probability in pursuit of what they may view as financial probity. It would not be the first time our major financial powers made that mistake.

ZEW Economic Index For Germany
  Level of Zew Index Averages
  Apr-11 Mar-11 Feb-11 Yr Ago 3Mo 6Mo 12Mo
Current 87.1 85.4 85.2 -39.2 85.9 84.1 55.5
Expectations 7.6 14.1 15.7 53 12.5 9.8 13.1
Current 99.1 98.2 98.1 31.7      
Expectations 46.6 50.8 51.9 76.2      
Percentiles are readings in this period as percentile of the full range of values back to 1/92
Count Percentiles: reading is stronger than this 'XXX' percent of the time...
Current 1.7% 1.7% 1.7% 48.9%      
Expectations 70.4% 62.5% 60.6% 33.0%      
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