Calculating the Ifo Business Climate
Ifo Business Climate Index
How the Ifo Business Climate Index is calculated with an example to illustrate how the balance values are calculated.
The Ifo Business Climate is a widely observed early indicator for economic development in Germany. It is based on ca. 7,000 monthly survey responses of firms in manufacturing, construction, wholesaling and retailing.
The firms are asked to give their assessments of the current business situation and theirexpectations for the next six months. They can characterise their situation as "good", "satisfactorily" or "poor" and their business expectations for the next six months as "more favourable", "unchanged" or "more unfavourable". The replies are weighted according to the importance of the industry and aggregated. The balance value of the current business situation is the difference of the percentages of the responses "good" and "poor", the balance value of the expectations is the difference of the percentages of the responses "more favourable" and "more unfavourable". The business climate is a mean of the balances of the business situation and the expectations.
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 percentage points 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. From the situation and expectations appraisal the mean is formed, which is the Ifo Business Climate balance for the individual month:
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).
For calculating the index values of the business climate and its components - situation and expectation - the balances are all increased by 200 and normalized to the average of a base year (currently 2005).
