ifo Business Climate Index

What is the ifo Business Climate Index?

The ifo Business Climate Index is the best-known and most closely watched indicator of economic development in Germany. Every month, the ifo Institute in Munich surveys several thousand companies in manufacturing, services, trade and construction. They assess their current business situation and their expectations for the next six months.

How the index is calculated

The answers are weighted and condensed into balances – the share of positive minus the share of negative responses – for the current situation and for expectations. The business climate combines the two and is expressed as an index in which 100 equals the average of a base year. A reading of 100 is therefore not a neutral line; what matters is the change. A rising index shows that companies are becoming more optimistic, a falling one that sentiment is worsening. ifo also publishes the situation and expectations components separately; the expectations are seen as especially forward-looking.

Why it matters for traders

Germany is the largest economy in the euro area, so the ifo index is followed far beyond its borders. As it is published for the current month, it gives an early signal for German growth well before official GDP figures. As with other economic data, markets react mainly to surprises: a much better-than-expected reading can support the euro and German stock indices such as the DAX, while a disappointment can weigh on them. In the US, the ISM Purchasing Managers' Index plays a similar role, and both are key inputs for fundamental analysis.