In the latest article in our series on economic indicators, we look at the ifo index, one of the leading indices for the European economy.
The Leibniz Institute for Economic Research at the University of Munich, better known as the ifo, is one of Germany's most important economic institutions. It was founded over 70 years ago, when in 1949, the South German Institute for Economic Research merged with the Information and Research Center for Economic Observation.
One of the most important figures in the creation of the ifo was Ludwig Erhard. The former German Minister of Economic Affairs (from 1949 to 1963) is considered the architect of Germany's "economic miracle" during the 1950s, and was Chancellor of Germany from 1963 to 1966.
The ifo Institute's aim is "to provide excellent research with economic policy relevance that provides policymakers and business leaders with a basis for making informed decisions." It also presents economic findings in a way that enables the media and the public to understand and put into context current economic and political events.
The former ifo president, Professor Hans-Werner Sinn, who headed the institute from 1999 to 2016, also had a significant influence at the institute. He repeatedly succeeded in initiating important public debates on various economic topics. For example, he frequently emphasized the danger of persistent inflationary tendencies in Europe and the US. The current president of the ifo Institute is Clemens Fuest, who is also a professor of economics at Ludwig Maximilian University in Munich.
In general, the ifo is not only concerned with macroeconomics and surveying companies, but also focuses on other areas, such as labor and demographic economics, industrial organization and new technologies, as well as energy, climate and resources.
As Europe's largest economy and the world’s leading exporter, Germany plays a crucial economic role, not only in Europe and the eurozone, but also globally. The sentiment and assessments by German companies of their situation are therefore of great importance. The monthly ifo business climate barometer provides broad insights into economic developments in Germany and therefore attracts a great deal of attention in financial markets.
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The ifo Business Climate Index is based on a survey that has been conducted regularly since 1972. Around 9000 German companies are surveyed each month on their current economic situation and business outlook for the coming months. In addition to manufacturing and construction, the services sector is also covered. The ifo index is thus considered the most important leading indicator for assessing trends in the German economy.
The companies' responses are weighted according to their size, meaning that a large company is weighted more heavily in the ifo index. Furthermore, the survey results are aggregated according to the sector weights in the German gross domestic product (GDP). For example, the results in the automotive sector are weighted more heavily than the results in a less important sector, such as the clothing sector.
The survey that the economic indicator is based on is conducted in the first week of each month. During the survey process, companies are asked to assess their current business situation and report their expectations for the next six months. Companies can describe their situation as "good", "satisfactory" or "poor", and their business expectations for the next six months as "more favorable", "unchanged" or "less favorable".
The ifo business climate barometer provides investors and financial markets with regular and broad-based insights into company sentiment that is important, given the global relevance of the German economy. The economic indicator provides information on their interpretation of the current business environment as well as their expectations with a view to the coming months.
This leading indicator plays a key role in recording and interpreting economic developments, particularly in times of crisis. We therefore always include the results in detail in our daily publication, the LGT Navigator.
Against the backdrop of geopolitical uncertainties caused by the war in Ukraine and ongoing supply bottlenecks and materials shortages, the ifo Business Climate Index stood at 90.8 points in March 2022.
The indicator reached its historic low of 74.3 points during the Coronavirus crisis in April 2020. The all-time high of 115.4 index points was reached in February 2011.