ZEW Indicator of Economic Sentiment - Considerable Disillusion Among the Financial Market Experts

The ZEW Indicator of Economic Sentiment for Germany dropped by 22.7 points in July. Compared with 37.8 points in June, the indicator's current level of 15.1 points is now far below its historical average of 35.2 points.

The future development of the German economy is subject to considerable risks. First of all, the skyrocketing oil price has negatively affected business expectations. Furthermore, exports are expected to decline in light of the economic downturn of the US economy and a strong euro. In view of the higher tax burden from January 2007 on it is not likely that an increase in domestic demand will compensate for these negative effects on German business expectations. For the first time the tax increase has been fully included in the six-month forecast horizon of the financial experts.

"The renewed decline of the indicator is a strong signal that the government's reform policy has not met expectations so far. Altogether, the citizens are forced to take on a higher burden without any success in reforms being visible or realized. The hope remains that the government's failure to efficiently carry out reforms will not negatively affect the investment climate", said ZEW President Prof. Dr. Dr. h.c. mult. Wolfgang Franz.

Due to the favourable development of industrial production, the financial experts surveyed again give a more favourable assessment of the economic situation in Germany. The corresponding indicator is up from 11.9 points to 23.3 points in July.

Economic expectations for the euro zone have also declined in July. The indicator decreased by 19.2 points and now stands at 18.1 points. This month, the corresponding indicator for the current economic situation in the euro zone rose considerably by 10.4 points to 25.9 points.

293 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 June 26 to July 17, 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