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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

ZEW Economic Sentiment

What it is:

The ZEW Economic Sentiment is a monthly survey of economic sentiment in Germany. (The acronym stands for Zentrum für Europäische Wirtschaftsforschung GmbH, or Centre for European Economic Research.)

How it works (Example):

The ZEW was founded in 1990 by the German government in conjunction with Mannheim University. It also conducts other forms of  microeconomic and macroeconomic research in five fields: international finance and financial management; labor, human resources, and social policy; industrial economics and international management; corporate taxation and public finance; and environmental economics.

The Center for European Economic Research is the German nonprofit organization that asks European economic experts how they feel about the German economy. The Scientific Advisory Council of the ZEW uses the information to compile a six-month forecast for the German economy.

The survey asks 350 respondents about the direction of inflation, interest rates, exchange rates, and the stock market over the next six months. There are only three responses an economist can have in the survey: positive, negative, or unchanged. This simplifies the results and speeds their tally.

The survey results show the spread between the number of experts who are optimistic and the number of experts who are pessimistic. If, for example, if 50% of the experts answer positive, 40% answer negative, and 10% answer unchanged, the ZEW figure is +10.

Why it Matters:

Economic sentiment often drives economies. In other words, when people believe that the economy will decline, it often becomes a self-fulfilling prophecy because their beliefs cause them to save more and spend less in preparation for the decline. Because everyone is saving more and spending less, retail sales decline, which costs jobs, which creates layoffs, which creates a declining economy.