What is the 'Ifo Business Climate Survey'

The Ifo Business Climate Survey is a closely-watched data point that is a leading indicator of German economic activity, which is released monthly. Because of Germany's economic position (it is the largest economy in Europe and the fourth-largest economy in the world), the Ifo survey is widely watched globally as well as by German analysts.

BREAKING DOWN '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 assess both the current business situation (as good, satisfactory or poor) as well as their expectations for the next six months (as 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 less poor for the current situation, and more favorable less 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 then constructed to yield outcomes between -100 (every firm gives a negative response on both questions) and +100 (every firm gives a positive response on 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.

Reasons for Variations in the Ifo Business Climate Survey

For May 2018, the Ifo business climate survey result index (base year 2005=100) was 102, but there was a wide variation between the current situation (106) and expectations (98.5). This means that the firms surveyed expect the next six months to show noticeably worse conditions than currently being experienced. Combined with the fact that the overall index, as well as both components, have been on a downward trend over the past few months, this outcome would signal some near-term weakness to be expected in the German economy.

The results of the balances calculations are also published monthly for both the overall German economy and each of the four sectors surveyed. In May 2018 this calculation (where the range of values is -100 to +100), the overall balance was 23.4. The services sector had the strongest balance at 26, and trade the weakest at 14.4. For all sectors expectations were below the current situation, reinforcing the reading from the overall index that near-term economic weakness could be expected.

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