ZEW Forecast Survey January 2008 – Banks Expect Slight Reduction in Interest Rates, No Upside Potential in Stock Markets

According to the assessment of leading financial experts from 18 banks, surveyed by ZEW on a quarterly basis, interest rates in the euro zone will slightly fall during the coming months. No significant changes are expected in the German and the European stock markets.

Short-term interest rates (3 months Euribor) are expected to fall by 36 base points to 4.40 per cent on average by March. For long-term interest rates, the experts predict a more moderate fall by 17 base points to 4.17 per cent. On a six months time horizon, short- and long-term interest rates will fall to 4.22 and 4.23 per cent respectively, according to the experts’ expectations.

For the German and European stock markets the experts surveyed expect little upside potential until mid-2008. The survey base value of the DAX was 8,039 points on December 27, 2007. The banks forecast a slight fall in the index to 7,925 points. The DJ Stoxx 50 is believed to increase slightly to 3,720 points on average and the TecDax is believed to remain unchanged at 970 points. “Due to the impacts of the credit crisis and the correction of the US real estate market, the banking institutions do not assume the DAX to rise”, explains Gunnar Lang from the ZEW research department “International Finance and Financial Management”. For mid-2008, twelve banks expect the DAX to stand at more than 8,000 points. On average, the DAX is assumed to stand at 8,166 points, the DJ Stoxx 50 is assumed to stand at 3,845 points and the TecDax is believed to stand at 1,026 points. Altogether, a majority of the banks forecast comparable values. The range between the values forecasted is 7,650 points (Landesbank Berlin, Nord LB) and 8,800 points (Commerzbank).

For the US dollar-euro exchange rate experts also predict only slight changes. In March 2008 the banks surveyed expect an exchange rate of 1,472 US dollars to the euro on average. On a six months time horizon they assume a slight fall in the exchange rate to 1.44 dollars to the euro.

The analysis of the forecast quality of all three- and six-months predictions made by the 17 banks between June 2001 and December 2007 shows a mixed picture. In terms of the overall evaluation the benchmark remains unbeaten. The benchmark for exchange rates and interest rates is the value from three or six months before and the benchmark for shares is the long-term trend update. Especially short-term interest rates but also the US dollar-euro exchange rate were mainly correctly assessed by the banks. Some banks forecasted better values than the benchmark. What is striking is that the average three and six months forecasts regarding stock markets proved to be very exact. In the overall ranking Dresdner Bank remains first, followed by Commerzbank, Bayern LB and Dakabank.

The analysis of the trend forecasts for the same period also shows that the forecast quality is especially high for short-term interest rates. The direction of changes in stock market indices and the US dollar-euro exchange rate were more often correctly forecasted than incorrectly. Currently, Commerzbank heads the ranking of trend forecasters, followed by Bayern LB, Hamburger Sparkasse, Dresdner Bank and Sal. Oppenheim.

For the fourth time ZEW separately analysed forecasts since September 2005. The results show a significant improvement in the forecast quality of German banks regarding capital market variables. Again, forecasts of all variables were better than the benchmark. What is striking is the high accuracy of forecasts of stock market indices that could not be seen in the long-term analysis. Dresdner Bank heads this overall ranking, followed closely by Deutsche Postbank, Commerzbank, Hamburger Sparkasse and BHF Bank.

Contact

Dr. Gunnar Lang, Phone: +49/621/1235-372, E-mail: lang@zew.de