IFO Business Climate: A Critical Component in Currencies Trading

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Germany has the largest economy in the European Union. That’s why its business climate is one of the most critical thing that impacts the rest of the European Union. Since 1972, the IFO Institute for Economic Research has published the IFO Business Climate Index, an important monthly survey, to measure the businessmen’s responses about the present business situation and their expectation for the coming six months. The survey is a statistical tool which measures the balance of the business situation and business expectation. It’s generally known as a leading indicator which shows the German economic activity.

The Business Climate Index is meant to supplement data from the executive statistics, such as the GDP report. If the GDP report is released on quarterly basis, this business climate index is more frequently collected and more quickly accessible. It also helps forecasting the turning points in the economic growth.

The survey conducted by the IFO Institute is made by phone and includes on approximately 7,000 firms in manufacturing, building, wholesaling, and retailing industry. The firms included in the survey are asked to provide their assessments about their present business situation as well as their business view for the next six month. The responses are assessed and seasonally adjusted.

The Business Climate balance point can take values from -100 until +100 and is standardized to the average of a base year (currently 2005). The balance value of the present business situation is the difference in the percentages of “good” and “poor” responses, while the balance value of the business expectations is the difference in the percentage of the responses marked “more favorable” and “more unfavorable”. The result is frequently described in the “business-cycle clock” figure.

A higher than forecasted reading in the business climate index should be taken as a positive trend (bullish) for the EUR and a lower than forecasted reading should be treated as a negative trend (bearish) for the EUR.

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