MNI 5 THINGS: German Aug ZEW To Reinforce Tentative EZ Outlook

By Jaspreet Sehmi

     LONDON (MNI) - Concerns over the Eurozone growth outlook have been

gathering steam in recent weeks, following a spate of disappointing data.

Tuesday's release of the August ZEW survey for Germany -- the bloc's largest

economy -- will help to add some colour as to whether the recent softness is

likely to persist. The monthly survey polls around 300 German institutional

investors on their views of current national and international economic

conditions, as well as their sentiments regarding the coming six months. 

     In July, the 'Current Situation' (CS) index fell back for a sixth

consecutive month, while the 'Economic Sentiment' (ES) index dropped to a near

six-year low of -24.7 -- well below its historical average of 23.2. The median

consensus projections for August point to a 0.3-point decline in the CS index

and a 3.5-point rise in the ES Index.   

     Positive CS Surprises & Negative ES Surprises Dominate In August: 

     MNI's analysis of actual vs. consensus historical data reveals that over

the past decade, markets have tended to underestimate the Current Situation and

overestimate Economic Sentiment (each seven times in total). The average

underestimate of the CS index on these seven occasions has been 6.5 points,

while in perfect symmetry, the average ES index overestimate has also been 6.5

points.  Overall therefore, our analysis suggests a reasonably strong

probability of the Current Situation registering higher than pencilled in by

markets in August, and Economic Sentiment undershooting expectations. 

     Economic Sentiment To Remain In The Doldrums: 

     While expected to edge higher in August, helped by a cooling in EU-US trade

tensions following the recent Juncker-Trump meeting, the ES index is nonetheless

set to remain at its weakest level since August 2012. Moreover, a number of

factors are likely to keep sentiment weighed over the coming months, including

persistent Brexit-related uncertainty, Italian budget concerns and the ongoing

US-China trade dispute. 

     Strong Current Situation Reflects Healthy German Economy: 

     While the Current Situation index has deteriorated throughout 2018 and is

expected to fall further in August, it remains far above its series average of

-6.5. This reflects a fundamentally healthy German economy. Favourable credit

conditions, record-low unemployment and relatively strong order books continue

to support private consumption and fuel investment. Meanwhile, the external

sector remains supportive of growth, with exports having climbed by 3.9% y/y in

H1 2018. However, with the U.S. continuing to investigate the potential for

imposing trade restrictions on car imports, German exporters remain

understandably nervous -- vehicles accounted for the largest share of exports in

2017 (at almost a fifth of the total value). 

     August Sentix Points To Potential Upside Current Situation Surprise...: 

     The more timely Sentix Economic Index for Germany registered an uptick in

August, with both the 'Current Situation' and 'Expectations' components driving

the overall improvement. The former had been on a consistently declining trend

for a number of months before posting a rise in August. This points to the

potential for an upside surprise in the ZEW CS index this month, suggesting that

it could also break its recent downtrend. 

     ...But DAX Dip Suggests Otherwise: 

     The DAX, which is reasonably well correlated with the ZEW Current Situation

index, has been on the decline so far in August, with investor sentiment having

been rattled by negative international developments, including the announcement

of new U.S. sanctions on Russia and concerns over the impact of Turkey's

economic woes on European banks. As such, with the ZEW survey capturing a more

recent snapshot of developments than its Sentix counterpart, any potential for

an upside surprise in the Current Situation index appears limited.  

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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