What Is the Ifo Business Climate Survey?

The Ifo Business Climate Survey is a leading indicator of German economic activity, compiled by the Munich-based Ifo Institute for Economic Research. Germany is the fourth-largest economy in the world and the biggest in Europe, so this monthly measure of the country's business environment and expectations is closely watched by economists and investors across the globe.

Key Takeaways

  • The Ifo Business Climate Survey is a leading indicator of German economic activity, gauging the country's business environment and expectations on a monthly basis.
  • Results are based on approximately 9,000 monthly survey responses from German firms in manufacturing, construction, the service sector, and trade.
  • Germany is the fourth-largest economy in the world and the biggest in Europe, so the survey's readings are closely monitored by economists and investors across the globe.

Understanding the Ifo Business Climate Survey

The Ifo Business Climate Survey is based on approximately 9,000 monthly survey responses from German firms in manufacturing, construction, the service sector, and trade. The companies surveyed are asked to provide feedback on whether their current business situation is good, satisfactory, or poor as well as assess their expectations for the next six months as either more favorable, unchanged, or more unfavorable.

The responses of the firms are weighted according to the economic importance of each industry, and a net balance is calculated for each assessment: good/poor for the current situation and more favorable/more unfavorable for the outlook—the "satisfactory" and "unchanged" responses are regarded as neutral and thus not included.

The business climate itself, the main subject of the survey, is then calculated as the mean of these two balances. The outcome is constructed to yield outcomes between –100, assuming every firm gives a negative response to both questions, and +100, meaning every firm gives a positive response to both questions.

The headline survey number that is released is, however, recalculated in the form of an index, which will be set to 100 in a base year. The base year currently in use is 2005.

Application of the Ifo Business Climate Survey

The Business Climate Survey is intended to serve as a leading indicator of economic cycle turning points in the German economy. Businesses, investors, and policymakers track the index in order to plan for future economic activity, prepare for changes in demand, or effectively respond to economic downturns. Once the index hits a tentative cyclical high or low point, three successive months of movement in the new direction is considered to define a new economic trend into the next phase of the business cycle. For example, the index reached a cyclical peak in Dec. 2006, providing little more than a year of advanced notice before Germany officially followed the global economy into the Great Recession in 2008.

German business confidence averaged 98.12 index points from 1991 until 2019, hitting an all-time high of 109.80 in Jan. 1991 and a record low of 80 in March 2009.

Special Considerations

The Ifo Business Climate Survey is viewed as a barometer not just of the German economy but the entire EU's as well. Germany accounts for more than a quarter of the bloc's output and is the number one trading partner for many of its European neighbors.

Germany's status as the engine of the European economy means its health also has a big bearing on the direction of the euro (EUR) currency. Foreign exchange (forex) traders, therefore, tend to keep a careful eye on business sentiment in the country as well.