ZEW Indicator of Economic Sentiment - Downward Trend continues

The ZEW Indicator of Economic Sentiment for Germany dropped by 20.7 points in August. Compared with 15.1 points in July, the indicator's current level of -5.6 points is now far below its historical average of 35.0 points.

The current development of the indicator is signalling a considerable economic downturn within the next six month. The main reasons for this are that exports, investment spending and consumption might decrease. Exports might be negatively affected by a drop in US demand for German products and a strong euro. The plan of the German government to tax interest payments within the framework of the corporate tax reform would make investment more expensive. Finally, private consumption might also decrease as a result of the value-added tax increase and higher energy prices.

"The assessment of the financial market analysts shows that the situation in 2006 and the expected development for spring 2007 still diverge considerably. The sunny assessment of the business climate in Germany might be justified in 2006, but in 2007 dark clouds will appear on the horizon. Only a wise and stout-hearted reform policy can ensure that the low pressure area will pass by the German economy", said ZEW President Prof. Dr. Dr. h.c. mult. Wolfgang Franz.

After strong prospective GDP growth in the second quarter of 2006, the financial experts surveyed again give a more favourable assessment of the economic situation in Germany. The corresponding indicator is up from 23.3 points to 33.6 points in August.

Economic expectations for the euro zone also declined considerably in August. The indicator decreased by 16.8 points and now stands at 1.3 points. This month, the corresponding indicator for the current economic situation in the euro zone rose by 9.0 points to 34.9 points.

307 analysts and institutional investors participated in this month's ZEW Financial Markets Survey which is conducted on a monthly basis by the Centre for European Economic Research (ZEW), Mannheim. The participants were asked from July 31 to August 21, 2006 about their medium-term expectations concerning economic activity and capital markets. The ZEW Indicator of Economic Sentiment shows the balance between positive and negative expectations regarding future economic activity in Germany within a timeframe of six months. The horizontal line indicates the historical mean of the indicator.

Contact

Dr. Sandra Schmidt, E-Mail: s.schmidt@zew.de  

Matthias Köhler, E-Mail: koehler@zew.de