The forecasting quality of the Ifo Index

In January 2006, the Ifo Business Climate Index reached its highest level since May 2000. Many have asked whether this high level leads us also to expect a similarly high growth as in 2000, or whether a higher business climate index "only" indicates that the upswing has gained in breadth but not how strong economic growth will be. This is correct in principle, but still the forecasting strength of the Ifo Index for economic growth is considerable. A good leading indicator is expected to provide timely signals of economic turning points and to progresses relatively smoothly so that the economic situation can be assessed quickly and reliably. Both demands are met by the Ifo Index. It gives clear, early signals on the state of economic developments. If one compares the Ifo Index with the growth of real GDP, it is clear that the Ifo Index is an extremely reliable indicator of the state of the economy in Germany.