The KOF Economic Barometer is a leading composite indicator that is used to provide a reading or measure of the direction of GDP growth in the Swiss economy.
The KOF Economic Barometer compares Swiss GDP growth from the same quarter in the previous year. For example, if it were March 31, 2020 (end of the first quarter), then the indicator would be comparing GDP growth with March 31, 2019. In such a way, economists are able to gauge relative standing between the two years, at the end of the exact same quarter.
The KOF Economic Barometer is a multi-sectoral aggregation that bundles over 500 individual indicators, measures 200 economic variables, and comprises three fundamental modules: construction, banking, and core GDP. It is posted monthly by the KOF Swiss Economic Institute and is a valuable tool used by investors who seek out Swiss investments.
History of the KOF Economic Barometer
In order to gauge the importance of the KOF Economic Barometer for Switzerland and foreign investors, it is beneficial to understand its history.
The first version of the KOF Economic Barometer was developed in 1976 by the KOF Swiss Economic Institute. It, however, only included six to 25 variables, which is a massive difference compared to the 200-variable version today. The 1976 version of the barometer remained the same for many years but was slightly modified in 1998, then again in April 2006.
In April 2006, the KOF Economic Barometer was designed with its distinct multi-sectoral design, changing the entire perspective of the economic measure. Comparing the 2006 version to the 1976 version, the newer economic barometer was able to use the latest available data and out-of-sample forecasting. With the use of out-of-sample forecasting, forecast accuracy improved exponentially.
Released and modified in 2014, the current model of the KOF Economic Barometer measures over 200 variables, bundles over 500 individual indicators, and provides three fundamental modules.
Overall, the indicator’s latest version was designed to be less prone to frequent revisions and is seen to be more transparent entirely.
Calculation of the KOF Economic Barometer
In order to generate valuable data on the direction of growth in the Swiss economy’s gross domestic product (GDP), the KOF Economic Barometer must go through two stages.
The first step in calculating the KOF Economic Barometer is to identify the key variables that are directly related to the Swiss economy and its GDP growth.
After identifying the variables, the system creates a large, 500 variable pool of possible factors that is different each year due to standardized statistical data.
The second step consists of the aggregation of the selected variables pooled into a composite indicator and component analysis. The actual values portrayed in the indicator occur from component extraction from the selected pool of variables and capturing co-movement in the data.
Capturing the co-movement of the variables selected in the pool of possible factors allows the system to reflect the Swiss business cycle, thus, measuring and comparing GDP growth.
Selection of Key Indicators
During the process of the KOF Economic Barometer, the selection of variables and indicators used is based on standardized statistical data. While the selection is automated, the system selects indicators based on specific characteristics.
1. Meaningful and Reliable
In order to process and present data that is relevant, it must be accurate and represent something that is pertinent to the Swiss economic condition.
2. Timely and Available
The KOF Economic Barometer can access the largest pool of Swiss economic data, allowing for timely statistical analysis.
3. Coincident of the Business Cycle
Considering the barometer is used to reflect the Swiss business cycle, variables and indicators that relate to the business cycle must be used.
For example, the indicator would unlikely be using statistical data like household stress levels because it does not exert a direct impact on the business cycle and GDP growth.
4. Representative Information
In order to be relevant and meaningful, the KOF Economic Barometer selects and presents statistical information that is relevant to the Swiss economy.
For example, there would be more emphasis on Switzerland’s leading export (gold), rather than a resource that is not used as proficiently in the economy, such as leather.