Use Ifo Business Climate Index to Forecast Market Trends

An Important Indicator of Economic Performance in Germany

The Ifo Business Climate Index is a leading indicator that shows the economic performance in Germany, which is based on surveys of firms in several sectors. It is released by the Ifo Institute for Economic Research. Since Germany is the largest economy in the European Union, many investors look at this indicator to predict the movements of the Euro.

This economic indicator is based on surveys of around 7,000 German firms, in which they are asked to evaluate current business situation and business outlook over the next six months. For calculation of the index, the transformed balances are normalized to the average of the year 2000. If the number is above 100, it indicates that the economy is good. On the other hand, if the number is below 100, it implies that the business climate is unfavorable.

The survey items include production, stocks, orders, selling prices, and employment. In particular, it is closely related with industrial production.

There is another similar economic indicator named “ZEW Indicator of Economic Sentiment”. As the Ifo Business Climate Index is based on a monthly survey of 7,000 business owners of firms, it is said that the Ifo Business Climate Index is better in assessing the economic performance of Germany than ZEW Indicator of Economic Sentiment.

Ifo Business Climate Index vs. ZEW Indicator of Economic Sentiment

There are a variety of indicators that assess the economic performance, such as, business climate index, economic sentiment indicator, and economic activity index. For these indices, the processes of conducting surveys are similar to each other. To assess the economic activities in Germany, there two indices: Ifo Business Climate Index and ZEW Indicator of Economic Sentiment.

Now, let us take a look at the differences between Ifo Business Climate Index and ZEW Indicator of Economic Sentiment.

・Ifo Business Climate Index
Survey population: approximately 7,000 business owners of firms
Source: Ifo Institute for Economic Research (one of the top five economic research institutes in Germany)

・ZEW Indicator of Economic Sentiment
Survey population: approximately 350 economists and analysts
Source: The Center for European Economic Research

There is a big difference in the survey population between the two indices. In the Ifo Business Climate Index, the survey responses are obtained from approximately 7,000 business owners of firms. In the ZEW Indicator of Economic Sentiment, the survey responses are collected from approximately 350 economists and analysts. Because the ZEW Indicator of Economic Sentiment is released a week ahead of the Ifo Business Climate Index, many investors pay attention to this indicator.

The neutral value of the ZEW Indicator of Economic Sentiment is 0. If it is a positive value, it indicates that the economy is improving. If the index is above 50 percent, it indicates that the economy is good.

Release Date of Ifo Business Climate Index and Time for Trade

Ifo Business Climate Index is released toward the end of each month. Because Germany is the largest economy in the European Union, many investors pay close attention to this leading economic indicator. When the Ifo Business Climate Index is released, it is very likely that there will be large movements in foreign exchange markets. Therefore, it is essential for investors, especially for those who trade currencies against the euro, to take a close look at this economic indicator.

Even though the euro is not as influential as US dollar which is the world’s primary reserve currency, it is one of the top three world currencies. When the Ifo Business Climate Index is released, large movements in the value of the euro are likely to occur. In addition, it is necessary to note that it may also have an influence on other currencies.

In general, when the index number is low, it indicates that the economy of a country is contracting and personal consumption is declining. On the other hand, when the index number is high, it indicates that the economy is growing and personal consumption is increasing. Since the Ifo Business Climate Index is correlated with exchange rates, when it indicates that the economy is growing, the value of the currency tends to rise, and when it indicates that the economy is contracting, the value of the currency tends to fall.

Why is the Ifo Business Climate Index More Reliable?

Finally, we would like to talk about the reasons why Ifo Business Climate Index is more reliable than ZEW Indicator of Economic Sentiment. By comparing the two indices, a big difference in the number of survey population can be noticed. The Ifo Business Climate Index is based on survey responses from business owners of firms instead of economists. It can evaluate the actual state of the economy of Germany in a more accurate way.

Why is it more accurate to evaluate the economic situation of Germany by carrying out a survey of business owners instead of economists?

The answer to this question is simple. There is no need for business owners to lie as there are no benefits in doing so. In addition, instead of based on expectations, business owners answer the questionnaires based on their real feelings to evaluate their current business situations.

It is possible that someone may slightly overstate as they may think that it is a survey report on economic indicator of the country. In foreign exchange margin trading, for investors, they only focus on the numbers which are final results from the surveys and trade by looking at these numbers.

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