Zew and Ifo economic indicators explained
Dave Green • 2 min read
There are two major business sentiment indices done in Germany that are unique to that country: the Ifo and ZEW indices. The big difference between the two is that the Ifo asks companies about their view of the current situation and their expectations for the future, while the ZEW asks similar questions to analysts and economists. Thus the Ifo is probably a better gauge of reality while the ZEW is a better gauge of investor sentiment.
1) The Ifo Index
The Ifo (Information und Forschung (research) Institute is part of the Leibniz Institute for Economic Research at the University of Munich. It was founded in 1949 and is one of the leading economic research institutes in Europe.The Ifo Business Climate index is based on a monthly survey of around 7,000 firms in manufacturing, construction, wholesaling and retailing. The firms are asked to give their assessments of the current business situation and their expectations 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 called a diffusion index. It is calculated by taking 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.
The Ifo Index is much like the Purchasing Managers’ Indices, except they are only done in Germany.
2) The ZEW Index
The Centre for European Economic Research (ZEW) in Mannheim, Germany is a nonprofit and independent institute founded in 1990 in co-operation with the University of Mannheim, ZEW is one of Germany's leading economic research institutes. It has four key objectives:
To conduct economic research
To provide economic policy advice
To train young economists, and
To inform the public
The ZEW Indicator of Economic Sentiment is a monthly sentiment index. Up to 350 financial experts take part in the survey. Like the Ifo, it is a “diffusion index.” That is, the indicator reflects the difference between the percent of analysts who are optimistic and the percent who are pessimistic for the expected economic development in Germany in six months. The survey also asks for the expectations for the Eurozone, Japan, Great Britain and the US.