What Is the KOF Economic Barometer?

What Is the KOF Economic Barometer?

Let me explain the KOF Economic Barometer directly: it's a leading economic indicator for Switzerland, designed with a multi-sectoral approach that includes core GDP, construction, and banking modules. This barometer bundles over 300 individual indicators to produce its monthly output, and it's published by the KOF Swiss Economic Institute.

Key Takeaways

You should know that the KOF Economic Barometer has been around since the 1970s. In its current form, it aggregates a selection of over 300 out of 500 available economic variables tied to the Swiss economy. Investors and traders rely on it to make informed decisions about Swiss investments.

Understanding the KOF Economic Barometer

The core idea behind the barometer is to signal the state of the Swiss business cycle, using a reference series that mirrors the monthly growth rate of Swiss GDP, and it does this as early as possible. You'll see that movements in the barometer typically lead those in the reference series by one month.

It shows leading properties not just for the synthetic reference series but also for actual quarterly Swiss GDP growth rates. Remember, the KOF Institute warns that you can't draw conclusions about the exact level of GDP growth from it, but financial market participants follow it closely anyway.

If the barometer reads higher than expected, it can strengthen the Swiss franc; lower readings might weaken it. That's the direct impact you need to consider.

A Calculation in Two Steps

The calculation happens in two main steps, and I'll walk you through them.

Step One

First, we identify variables with theoretically valid ties to the Swiss economy and an empirically proven leading relationship to the reference series, which is based on interpolated monthly Swiss GDP growth from quarterly data. The pool includes over 500 variables, and the mix changes yearly based on standardized statistical criteria.

Step Two

Then, we aggregate the selected variables—currently over 300—into a composite indicator using principal component analysis. The barometer reading comes from extracting the first principal component, which captures the co-movement in the data reflecting the Swiss business cycle.

History of the KOF Economic Barometer

The KOF Swiss Economic Institute has been publishing this barometer since the 1970s, with methodology changes in 1998, 2006, and most recently in 2014. Older versions used six to 25 variables from the Swiss Federal Statistical Office, but the 2014 version incorporates over 300 variables in the second stage.

This larger set makes the indicator more stable and robust. The latest version aims to be more transparent and less subject to frequent revisions than previous ones.