Germany ZEW Index: Is the Worst Over?

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Germany believes in a rebound! Another update on economic expectations from ZEW suggests that the worst for the Eurozone economy may be behind. Or at least perceived that way.

After the V-shaped movement in March and April, the ZEW index, which gives an aggregate current assessment and expectations of 350 financial experts and economists, stabilized in May. The expectations index changed from 28.2 in April to 51.0 in May.

At the same time, the current situation assessment index fell to -93.5, the lowest since 2003. The improvement in expectations obviously reflects the purely psychological effect of lifting of lockdowns, the latest episode of growth observed in European equities (which works as a leading indicator itself) and increased support from fiscal authorities and the ECB.

The ZEW index refers to comparative statistics, therefore, the rebound above the neutral mark of 50 points in May, to 51 points, suggests that expectations of the respondents became slightly better than in April. The “low base” effect accounted for the increase of the index above 50 points. This U-turn is now of particular interest, since it may be indicative of ф turning point in the economy. In general, soft data becomes more important when markets are on the look for signs of bottoming out and insights from leading indicators can give big advantage for savvy investors. Even if equities ran far ahead of themselves in the current rally, then expectations, not the hard data were the fuel for this growth.

ZEW expectations index for Eurozone rose from 25.2 to 46 points which suggests that the bloc’s recovery lags behind of Germany. However high-frequency data on consumer mobility in the Eurozone indicates that easing of the lockdowns will be very soon reflected in the bloc-wide soft data. If in April the mobility index based on Google Mobility data for Eurozone countries amounted to 60% of the January level (reflecting the peak of lockdowns) it has increased in May to 80%:

Important thing to bear in mind trying to understand why bad economic data produces such tepid response is the fact that lockdowns took only a small part of the 1Q (the last weeks of March) and reached peak in the Eurozone in April. This means that GDP data for the second quarter, which we have not seen yet will most likely be worse than what we saw in the first quarter. Based on the stock market rebound investors may have already discounted that dismal 2Q data and are now trading the third and fourth quarter, which are widely considered to be recovery quarters. Market prices basically reflect a recovery which is at least 2 quarters ahead.

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