What it means
ZEW is a German economic research centre, and each month it asks a panel of financial experts about their expectations. The questions cover growth, inflation, interest rates and share prices.
The answers are combined into an index that shows whether sentiment is improving or worsening. The headline figure is a balance, meaning the share of respondents who are optimistic minus the share who are pessimistic.
A positive reading means more optimists than pessimists, and a negative reading means the opposite. The number can range from -100, if everyone is pessimistic, to +100, if everyone is optimistic.
Because it is based on expectations rather than hard data such as production or sales, the indicator tends to move early. A rise can signal that analysts expect a recovery before it shows up in official figures.
Traders, treasurers and economists use it to adjust forecasts, hedging and investment plans. There is an important nuance.
The survey asks people who work in financial markets, not business owners, so it reflects the views of professionals who are quick to react to news. It also measures expectations of change, not the level of activity, so a reading of zero does not mean the economy is stagnant.
The release is part of a wider family of sentiment surveys, including purchasing manager indices and business confidence indices. A finance team should read it with those, not alone.
Together they give a fuller picture of whether the economy is likely to speed up or slow down, and they help a business choose the right time to hire, invest or hold cash. The publication date also matters.
The release comes out around the middle of each month, before many hard data series for that month are available, which is why markets react to it quickly. A surprise against the forecast average can move currency, bond and share prices within minutes.
In practice
Real-world examples.
Example
A German exporter with $30,000,000 of annual sales reads that sentiment has risen sharply. The finance director decides to bring forward the purchase of raw materials. She also tells the sales team to expect stronger orders.
Example
A currency trader sees the index jump above forecasts. He reasons that the euro may strengthen if investors expect growth, and buys a small position. He sets a stop loss in case the data is misleading, and he reviews the position when the next monthly figure is published.
Example
A corporate treasurer in another country reviews the reading before setting next year's budget. A weak reading leads her to plan for lower demand from European customers. She builds a downside scenario into the cash forecast and shares it with the sales team, so that spending plans can be adjusted if orders come in below budget.
Formula
Calculation
Balance = Percentage of optimistic responses - Percentage of pessimistic responses
Suppose 100 analysts are surveyed about the next six months. Of these, 45 expect conditions to improve, 20 expect them to worsen and 35 expect no change. The balance is 45% - 20% = 25 points. The 35% who expect no change do not count in the balance, though they matter for how confident the reading is.Case study
Seen in the real world.
Rhine Valley Components is an illustrative, fictional supplier of machine parts to German manufacturers. Its finance director follows the monthly sentiment reading and notes that it has fallen for four months in a row. The balance has dropped from +25 to -10.
She asks the production team to reduce overtime and defer a $1,500,000 equipment purchase. Three months later, official industrial orders confirm a slowdown, and customers ask for lower volumes. Because Rhine Valley has already adjusted, it avoids building up unsold stock. The deferred purchase is revisited once the reading turns positive again.
The illustrative lesson is that survey indicators give early warning, but they can be wrong. The company treats the reading as one of five signals and does not make large decisions on a single month's number.
Watch out
Common mistakes.
- Treating the survey as a measure of current activity, when it measures expectations for the coming six months.
- Reading a single month in isolation, when the trend over several months is more informative.
- Assuming it represents all businesses, when it surveys financial analysts and institutional investors.
Questions
People also ask.
Who publishes the ZEW indicator?
It is published by the ZEW research institute in Mannheim, Germany, based on a monthly survey of financial experts.
What does a negative reading mean?
It means more respondents expect conditions to worsen than to improve, not that the economy is already shrinking.
Why do markets care?
It often moves before official data, so it helps traders and treasurers form early views on growth and interest rates.
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