What Is the KOF Economic Barometer?
The KOF Economic Barometer is a composite indicator that provides a reliable reading on the direction of GDP growth for the Swiss economy compared with the same quarter a year earlier. The KOF Economic Barometer is based on a multi-sectoral design with three modules: core GDP, construction, and banking. The barometer has a complex structure because it bundles over 200 individual indicators in several steps. It is published monthly by the KOF Swiss Economic Institute.
- The KOF Economic Barometer is a composite leading indicator of Swiss GDP growth.
- The current version of the Barometer is constructed of an aggregate of over 200 economic variables related to the Swiss economy.
- Investors and financial traders use the KO Economic Barometer to inform decisions regarding Swiss investments.
Understanding the KOF Economic Barometer
The concept of the barometer is to indicate the status of the Swiss business cycle, as captured by a reference series that reflects the Swiss GDP monthly growth rate, as early as possible. Movements in the KOF Economic Barometer on average lead movements in the reference series by one month. The KOF Economic Barometer demonstrates leading indicator properties with respect to both the synthetic reference time series and with actual quarterly growth rates of Swiss GDP.
Although the KOF Institute cautions that no conclusions can be drawn about the level of the GDP growth rate on the basis of the KOF Economic Barometer, the barometer is closely followed by participants in the financial markets. Barometer readings that are higher than expected may have the effect of strengthening the Swiss franc, while lower than anticipated readings may weaken the Swiss franc.
The calculation of the KOF Economic Barometer comprises two main stages. First the variables are selected, and then these variables are combined into one leading indicator.
The first step consists of identifying variables that have theoretically valid relationships to the Swiss economy and empirically established leading relationship with the reference series based on monthly Swiss GDP growth (interpolated from quarterly data). The present pool of possible factors consists of more than 400 variables. Over 200 selected variables are typically included, but this changes from year to year based on a standardized set of statistical criteria.
The second step is the aggregation of the selected variables into a composite indicator by principal component analysis. The KOF Economic Barometer is generated by extracting the first principle component of the selected panel of variables to capture the co-movement in the data, which should reflect the Swiss business cycle.
History of the KOF Economic Barometer
The KOF Swiss Economic Institute has published the KOF Economic Barometer since the 1970s. The methodology was changed in 1998 and in 2006. The most recent revisions were made in 2014. In older versions of the KOF Economic Barometer six to 25 variables were included, based on data from the Swiss Federal Statistical Office. In the current version, adopted in 2014, over 200 variables enter the second stage. The large number of component variables allows for a stable and robust final indicator. The latest version of the Barometer is also intended to be more transparent and less prone to frequent revision than past versions.