ZEW Indicator of Economic Sentiment

Over the past months, public debate has centred around the diverging economic expectations presented in the ZEW Indicator of Economic Sentiment by the Centre for European Economic Research (ZEW) and the ifo Business Climate Index. Whereas the ZEW Indicator of Economic Sentiment has already been falling since February 2006, the ifo Business Climate Index started to indicate an economic downswing in 2007 only two months ago. The broad public, however, was not aware of the fact that the ZEW Indicator of Economic Sentiment solely represents estimations, whereas the ifo Business Climate Index comprises two elements: business situation and business expectations.

Both institutes project an assessment of the current situation and expectations regarding the future economic development. While ZEW displays two separate indicators, the ifo institute combines both of them in the form of the ifo Business Climate Index. A convincing comparison would thus require the examination of the ZEW Indicator of Economic Sentiment and the ifo business expectations. The latter have already been declining since April 2006 and signal a weaker economic growth in Germany starting in the third quarter of this year. Since the ZEW indicator has suggested an economic downswing since February 2006, it is once more to be noticed that the ZEW Indicator of Economic Sentiment is one to two months ahead of the ifo business expectations.

Last year, this lead was confirmed in a ZEW study on the capacity of the ifo business expectations and the ZEW Indicator of Economic Sentiment to forecast the future economic developments in Germany. Several empirical studies conducted in the previous years had already verified the lead of the ZEW Indicator of Economic Sentiment.

The decline in business expectations is testified by the current prospects for the economic growth. In the view of the rising interest rates, many economists expect a cooldown in the global economy accompanied by an economic downturn after the considerable increase of the gross domestic product in the second quarter. The German economy thus seems to have reached its peak in the second quarter.

Contact

Prof. Dr. Michael Schröder, Phone  +49/621/1235-140, E-mail: schroeder@zew.de

Matthias Köhler, E-mail koehler@zew.de