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.

Example of the Ifo Business Climate Survey

At the time of publishing, business sentiment in Germany slumped to its lowest level in seven years. In Aug. 2019, the Ifo Business Climate Survey fell further into negative territory, slipping from 95.8 to 94.3. That reading represented the fifth consecutive month of waning morale among business executives.

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.

Expectations for the next six months were particularly negative, slumping to 91.3—the lowest figure in more than a decade. The main source of this anxiety is global trade tensions. Germany's economy is heavily dependent on exports, so trade disputes, and question marks surrounding the nature of the U.K.'s exit from the European Union (EU), otherwise known as Brexit, has rattled confidence in what lies ahead.

Uncertainty in the automobile sector is not helping much, either. This industry, a big driver of economic growth in Germany, has been pummeled with strict regulations following a series of emission cheating scandals. Many of its key players also face an unclear future as cars shift away from combustion engines to electric-powered batteries.

Special Considerations

The Ifo Business Climate Survey is viewed as a barometer not just of the German economy but the entire EU one, 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.