Explaining Business Sentiment: Insights from the ifo Business Survey

The ifo Business Climate Index is one of the most important leading indicators for the German economy. It is based on a monthly survey of approximately 9,000 firms and reflects responses to two core questions: the assessment of the firms' current business situation and their expectations for the next six months. These questions are deliberately formulated without precise definitions, allowing each respondent to draw on its own relevant factors. This paper investigates which factors firms actually consider, whether they differ across sectors and firm types, and how their importance has changed over time. To this end, we conducted a dedicated meta-survey in 2019 and repeated it as part of the regular ifo Business Survey in 2025. Our results show that internal factors - such as profit situation, demand, and turnover - are the primary drivers of firms' assessments. However, external influences, particularly the economic policy framework and general economic sentiment, have gained importance in recent years. These findings enhance the interpretability of the index and contribute to understanding its strong forecasting performance. The identified factors may also prove valuable for applied business cycle analysis.