IFO Business Climate in industry an trade
The Ifo Business Climate Index is a widely observed early indicator for economic development in Germany. Every month the Ifo Institute surveys more than 7,000 enterprises in west and east Germany on their appraisals of the business situation (‘good’ / ‘satisfactory’ / ‘poor’) and their expectations for the next six months (‘better’ / ‘same’ /
‘worse’). The replies are weighted according to the importance of the industry and aggregated. The percentage shares of the positive and negative responses to both questions are balanced, and a geometric mean is formed from the balances, divided according to east and west Germany. The series of balances thus derived are linked to a
base year (currently 1991) and seasonally adjusted.
In addition to the index values, the Ifo Institute also published the original balances of the Ifo Business Climate.
The Ifo Business Climate balances can fluctuate between extreme values of -100 (i.e., all responding firms appraise their situation as poor or expect business to become worse) and +100 (i.e., all responding firms assessed their situation as good or expect an improvement in their business). In actual fact, the balances fluctuate around the zero value, the fluctuations being considerably smaller (even the negative ones) than the index values, which start from a base of 100.
An example to illustrate how the balance values are calculated:
Of 100 responding firms, 40% appraise their business situation as satisfactory, 35% as good and 25% as poor. The firms that assessed their situation as satisfactory are considered to be “neutral” and do not affect the results of the business-situation appraisal. The two remaining percentage values (35 – 25) are now balanced. The resulting value of 10 is the business-situation appraisal, i.e. the first component of the business climate in the form of a balance. The six-month expectations are calculated the same way. When this value has been determined, the geometric mean is formed from the situation and expectations appraisal. This geometric mean is the Ifo Business Climate balance for the individual month.