Testing the Ifo Business Cycle Clock

The Ifo Business Climate for German trade and industry has been regarded as the most important indicator of economic development in Germany for many years. It consists of the average of two components: the current business situation and the business expectations for the next six months. Since 1993, the cyclical relationship between the two components has been presented in a four-quadrant economic phase diagram, the Ifo Business Cycle Clock. Unlike the usual development pattern of indicators along a time axis, in this diagram the economy moves circularly in a clockwise direction. The advantages of the Ifo Business Cycle Clock for economic analysis are that it is available within a very short time, is not subject to revisions and gives clear signals without major distortions. All in all, the Ifo Business Cycle Clock is suitable for displaying the economic development in the economy as a whole solely on the basis of business assessments and expectations. The Ifo Business Cycle Clock is less suited, however, for clearly separating the individual economic phases of the filtered real gross domestic product from each other. Its strength is that it is a very good alternative visualisation of the current economic development.