The indicator was a true innovation in December 1991, recalls project manager Michael Schröder. Until then, there was no survey that specifically asked financial market experts about their economic forecasts. “We ask people who have to assess macroeconomic and financial market developments in their everyday professional lives. They know the subject well and can tell us directly what their expectations are for the financial market,” Schröder emphasises in the podcast. The survey participants for the ZEW indicator include employees of banks, fund companies and investment firms. Depending on whether respondents expect the economy to improve or worsen, they assign the index a value from minus 100 to plus 100. In addition, the survey has a very practical advantage: a representative survey of economic expectations among financial market experts requires far fewer participants than surveys among companies, says Schröder.
Economic expectations are relevant for financial markets and science
A number of studies using high-frequency data have shown that the financial markets sometimes respond directly to the publication of the ZEW Indicator of Economic Sentiment. Publishing economic expectations that are particularly positive or negative and not previously expected by financial market players can trigger significant reactions in the German stock index (Dax) or in the Bund Future, a futures contract on a long-term bond issued by the German government, says Schröder. “There seems to be a measurable response when expectations include a large unexpected component.”
The survey results do not only play a role for the financial markets, they are also important in scientific studies. “We have been able to identify more than 50 scientific publications that work with the data,” says Schröder. Among other things, research is conducted on how accurately the indicator makes predictions compared to other indicators. “Our experts perform significantly better than participants in other surveys, some of whom give forecasts that are negatively correlated with actual stock returns. Our experts manage to forecast in which direction the trend will go,” says Brückbauer, who has analysed Dax forecasts himself in his research.