The KOF's leading economic indicator dropped surprisingly sharply this month. At 99.8, the headline index was almost 4 points short of its (upwardly revised) July reading and below its 100 long-run average for the first time this year.
August's decline was the steepest since February 2015 when the economy was suffering the fallout from the SNB's surprise decision to abandon its minimum target level for EUR/CHF. Weakness was particularly apparent in manufacturing, where shrinking orders was an especially worrying feature, banking and tourism as well as in international business activity. However, it was not all bad news as domestic consumption and construction made some limited headway.
August's results could prove misleadingly soft as the index can be quite volatile on a monthly basis. Even so, the drop warns that the economic recovery may be running out of steam. The SNB will not be happy.
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.