Previewing Germany s ZEW

Both of Germany’s main business surveys are scheduled for release this week; due on Tuesday is the February ZEW Survey (survey of financial market participants), and on Friday is the February IFO Survey on business sentiment (survey of business managers).

The February ZEW economic expectations index (due at 10am GMT) is expected at 35.0, after shooting up to 31.2 in January, the highest level in 32 months. That was also the highest point-increase in 11 months. The ZEW current situation index is expected at 9.0 in February, after rising to merely a three-month high of 7.1 in January.

For explanations about the difference between the ZEW and IFO survey, see our most recent piece here.

As both the ZEW and IFO surveys have both revealed, the expectations components tend to show the steepest increase during recovery phases, leading the more coincident components, which are a reflection of more current events. And since the ZEW survey focuses on financial market players, the responses are likely to be more ebullient than those by business planners and managers.

More importantly, we draw attention to the chart below, which indicates the current recovery in the ZEW expectations component is similar to that in early 2009 (circled) as it is supported by a recovery above the 50.0 expansion/contraction line in the German Purchasing Managers Indices for both services and manufacturing sectors. Furthermore, both instances (early 2009 and late 2012/early 2013) seem to coincide with more extended recoveries in the IFO surveys. The PMI chart illustrates not only that it is the least volatile of the three surveys, but also most likely to show durable trends.

The anti-Euro case can be made by the argument that the 6% appreciation in the euro year-to-date cannot be sustained by the still-troubled eurozone as exports sustain a double whammy of uncompetitive currency and sluggish global growth. But these arguments can be countered by robust domestic German demand, serving as the anti-thesis of the export machine, which goes the extra step in sustaining aggregate demand, corporate bottom lines and Berlin’s ability to lead the eurozone. Not only must we watch for continued improvements in this week’s ZEW and IFO surveys, but there must also be a favourable and persistent response from the services and manufacturing PMI, which are crucial in dispelling calls for renewed ECB easing and a more stable currency.

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