Many companies and investors use various indicators to gain an overview of a country's economic situation. Leading indicators help to assess the future development of a country. One of these indicators is the ifo Business Climate Index. This article explains exactly how this indicator is calculated and what it tells us.
ifo Business Climate Index Definition
The Leibniz Institute for Economic Research at the University of Munich, ifo Institute for short, is a research institute based in Munich. It is a non-profit organization with a focus on economic research. The institute is best known for publishing the ifo Business Climate Index. This sentiment indicator has been published at regular intervals since 1972.
This is a Leading indicator of the German economy. This is operated by the research institute published monthly. In Germany, this indicator is the most important and best known and is taken into account by companies, markets and politicians alike.
ifo Business Climate Index Explanation - How is the indicator calculated?
The Institute determines the leading indicator by Regular surveys. German companies are taken into account and asked about their economic situation and expected developments in the coming months.
In total, the institute receives data from around 7,000 companies in order to achieve sufficient representativeness. These surveys are carried out with Questionnaires. If the evaluation is carried out, the responses from larger companies and sectors are weighted more heavily.
In order to determine the indicator in good time, the questionnaires are sent out to companies from the various sectors in the first week of the month. These include the service sector, manufacturing, trade and construction.
- The companies can assess their current economic situation with the options “good”, “satisfactory” or “poor”.
- They are also asked what development they expect in the next six months. They can choose between the answers “more favorable”, “stable” or “less favorable”. Companies ask themselves the question of whether a Profit growth is to be expected.
- The questionnaire contains around 20 questions in total. These include questions on employment or current demand, for example.
For the calculation of the business climate, the geometric mean of the balances is used. For example, the target value for the current economic situation is the difference between the percentages of the answers “good” and “bad”. The index value is then determined by standardizing the already calculated business climate to the average of the base year.
The ifo Business Climate Index is published every month on the last Tuesday. Prior to publication, a press release is issued and an internal vote is held. The leading indicator can be viewed on the institute's public website from 10:30 am.
ifo Business Climate Index - Interpretation
The interpretation is comparatively simple. The value 100 corresponds to the respective base year. If the survey shows a Value over 100 is achieved, the companies surveyed in positive mood, The economic development and the current economic situation are not yet clear.
If a Value below 100 the economy, on the other hand, is characterized negative mood. A value of 100 means neutrality. This means that no negative or positive developments are to be expected. One example is the historical low of 74.3 during the coronavirus crisis in April 2020, which demonstrates the strongly negative economic sentiment of the crisis.
A Advantage compared to other indicators, such as the Gross domestic product, is the Regular publication. The ifo Business Climate Index is a monthly sentiment indicator, while other indicators are only published on a quarterly or half-yearly basis.
Compared to other data, however, the ifo Business Climate Index is less reliable, as it works with assessments of companies and not with fixed information or figures. Critics point out that psychological factors can influence the indicator, as it based on estimates only. It also provides information on trends. It can No precise forecasts on economic growth.
The ifo Business Climate Index and its benefits
Taking the leading indicator into account can be useful for investors. If there is a positive mood among the German companies surveyed, this is a sign of imminent positive economic development. This could increase demand for cyclical shares.
The ifo Business Climate Index can useful for economic experts, companies and politicians and possible Economic turning points to show. It can therefore be an advantage to take this into account in your own planning. A positive ifo business climate index can indicate increasing demand, which has a positive effect on companies.
Conclusion: ifo Business Climate Index - What is it?
The ifo Business Climate Index is a leading economic indicator and is published monthly by the Leibniz Institute for Economic Research. It is a sentiment indicator based on company assessments and not on specific key figures.
The Institute collects its data using a questionnaire and around 20 questions relating to the current economic situation and the expected economic development over the next six months. In the process Data from around 7,000 groups evaluated.
The value of the business climate can be a Number between 0 and 200 where the value 100 refers to the respective base year and thus signals neutrality. A value above 100 indicates a positive mood with regard to economic development, while a value below 100 indicates a negative mood.
Economic experts, companies, politicians and investors use the leading indicator to identify possible trends in advance. One advantage of the indicator in contrast to many others Economic indicators ist die Regular publication in comparatively short periods of time. Criticism relates, for example, to the unreliability, as the value is only based on estimates and Precise forecasts not possible are.