What Does the KOF Economic Barometer Indicate?

The KOF Economic Barometer is a composite indicator that provides a reliable indication of the direction of Swiss GDP development compared to the same quarter the previous year. The KOF Economic Barometer is based on a multisectoral design with three modules: GDP per capita, construction, and banking.

The barometer’s structure is intricate because it combines over 500 individual indicators in several stages. The KOF Swiss Economic Institute publishes it every month.

How to Interpret the KOF Economic Barometer

The barometer’s goal is to provide the earliest possible indication of the state of the Swiss business cycle using a reference series that reflects the monthly growth rate of the Swiss GDP. The KOF Economic Barometer leads the reference series by an average of one month. The KOF Economic Barometer exhibits leading indicator characteristics about synthetic reference time series and genuine quarterly growth rates of Swiss GDP.

Although the KOF Institute cautions that no conclusions can be derived about the GDP growth rate level based on the KOF Economic Barometer, financial market participants closely monitor the barometer. Higher-than-expected barometer readings may strengthen the Swiss franc, while lower-than-expected readings may have the opposite effect.

The KOF Economic Barometer calculation consists of two major phases. The selection of the variables comes first, then their combination into a single leading indicator.

First, variables with theoretically valid links to the Swiss economy and leading relationships with the reference series based on monthly Swiss GDP growth (interpolated from quarterly data) are found. The current pool of potential factors consists of more than 500 variables, the specific combination of which varies yearly according to a standard set of statistical criteria.

Principal component analysis then aggregates the specified variables into a composite indicator. The first principal component of the chosen set of variables is taken out to get the KOF Economic Barometer. This is done to see how the variables move together in the data, which should show the Swiss business cycle.

The background of this Economic Barometer

Since the 1970s, the KOF Swiss Economic Institute has published the KOF Economic Barometer. In 1998 and 2006, the methodology was modified. 2014 marked the most recent revisions to the document. Six to twenty-five variables were included in older iterations of the KOF Economic Barometer based on Swiss Federal Statistical Office data. In the 2014 adopted version, more than 200 variables joined the second stage. The large number of component variables permits a stable and robust final indicator. Additionally, the latest iteration of the barometer is intended to be more transparent and less susceptible to frequent revisions than previous versions.

Conclusion

• The KOF Economic Barometer is a set of indicators that show how the Swiss economy is growing.
• Over 200 important economic factors for the Swiss economy make up the latest version of the Barometer.
• The KO Economic Barometer helps investors and buyers decide where to put their money in Switzerland.