KOF Economic Barometer - Explained
What is the KOF Economic Indicator?
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What is the KOF Economic Barometer?
This is an amalgamated indicator used in Switzerland to provide reliable readings on the growth of the economy in comparison to a similar quarter in the previous year. The barometer has a multi-sectoral design made up of three components which are core GDP, banking, and construction. It rolls up to 20 individual indicators in several steps making it a multiplex structure. The KOF Swiss Economic Institute publishes it each month.
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How is the KOF Economic Barometer Used?
Players in the Swiss financial markets follow this barometer keenly even though the KOF institute stipulates there are no viable conclusions that can be drawn based on this barometer on the GDP growth rate. The readings that are greater than expected tend to strengthen the Swiss Franc while those that are lower can weaken it. The institute has published the KOF Economic Barometer since the 1970s. The methodology has kept changing such as in 1998, 2006 and most recently in 2014. A reference series determined by KOF forms the basis of the current barometer version. This series contains month-on-month growth rate of the Swiss GDP that is computed from the breakdown of data from the Swiss Federal Statistical Office by the Swiss State Secretariat for Economic Affairs. The notion of the barometer is giving an early indication of the bearing of the Swiss business cycle as shown by the reference series. Currently, the database has over 400 variables, and so two standards are used to determine which variables to use in the barometer calculation. The first is that the variables must influence the Swiss business cycle and the second is that when cross-correlated with the reference series, the variables must show a combination of lead and minimum strength. An algorithm is then repeated every fall based on these variables which are over 200 although they change yearly. This ensures that the barometer learns and becomes flexible. A group called SNBCHF.com which provides an understanding into the Swiss economy and financial markets stated that in March 2018 the barometer fell by 2.4 points to a reading of 106.0. It, however, explained that this reading was still above the long term average and it meant that the Swiss economy would continue to grow above the average rates.
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