The KOF leading economic indicator rose surprisingly sharply in July. From a marginally firmer revised June reading, a 10 point bounce put the index at 99.8, its highest level since August 2014 and only just 0.2 points shy of its long-run average.
However, the headline gain hid very mixed performances by its component parts. Hence, prime costs, exporters' expectations and manufacturing competitiveness all improved significantly but banking and construction continued to struggle alongside private consumption.
Still, the July increase offers real hope that the economy is beginning to adjust to January's dramatic appreciation by the Swiss franc. It also suggests that next week's July PMI should move back into positive growth territory.
The KOF Economic Indicator is a composite leading indicator that aims to identify shifts in the Swiss business cycle around three months ahead of the actual event and, until the start of 2014, was based on twenty-five different economic indicators. The old version of the KOF Economic Indicator used the previous year's GDP growth rate published by the Swiss State Secretariat for Economic Affairs (SECO) as a yardstick. The revised measure still incorporates SECO data; however, KOF has changed over to month-on-month changes in GDP which are generated via statistical methods. This reference series is not about exact GDP figures but about the direction and strength of the economic trend. The new objective of the Barometer is the same as the old objective: achieving maximum possible accuracy in predicting the Swiss business cycle.
The indicator measures overall economic activity through a qualitative business survey about developments in the recent past, the current situation and expectations for the next three to six months. Getting an accurate handle on where the economy is headed is inevitably a vital element in all investment decisions and the new measure uses some 219 variables in order to do just that. The set of variables will be reviewed every autumn.
Survey questions relate to production, orders and stocks of finished goods. The Swiss Institute for Business Cycle Research (KOF) publishes this indicator monthly.
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