IFIS index for the second quarter of 2018: Continuing mitigation of financial conditions

Affected by both the domestic and foreign factors, financial conditions continued to mitigate in the second quarter of 2018, when compared with the previous quarter. The domestic component trends registered a favorable impact on financial conditions, although the mitigation trend slowed down when compared to the end of the first quarter when the domestic component reached its lowest value since March 2005 due to the exceptional growth of surplus liquidity. Mild financial conditions on the domestic market, even at the end of the first half of 2018, remain influenced by surplus liquidity and a decrease in government bond yields due to positive trends concerning government finances indicators and consequential credit rating upgrades. On the other hand, when compared with the first quarter, foreign factors registered a turn toward financial conditions mitigation in the second quarter, which was marked by considerable exacerbation of financial conditions on the foreign market due to a strong rise in volatility on global markets and an increase in government bond yields. The foreign component of the index is again registering financial conditions mitigation in the second quarter accompanied by decreased volatility amid positive economic trends and positive expectations concerning global economic growth, whereby the global capital markets managed to somewhat compensate for the losses generated by the first-quarter fall in share prices. Mild foreign conditions face a risk from political problems threatening the European Union and the possibility of a global trade war.


 

What is IFIS? 

IFIS is a monthly financial conditions index developed by the Institute of Economics, Zagreb. It provides timely information on the average financial conditions in the economy which can serve as a significant determinant of projections and, consequently, of future economic activity. Financial conditions estimates can be useful for economic activity projections, macroeconomic policy evaluation and financial investment decisions.    
 

How is IFIS calculated?

Overall financial conditions are influenced by a number of variables. The variables are selected so as to reflect changes in the local and international financial environment, taking into consideration the specific features of the local market. To be able to estimate the developments in financial conditions based on the large clusters of variables, it is necessary to extract data from various parts of the financial system into a simple and easily understandable index. The IFIS index is calculated as the pondered average of variables that represent the fluctuations in the financial system, using the frequently applied method of principal components analysis. IFIS is standardized so that its arithmetic mean equals zero (which is the average index value in the entire observed period), while the standard deviation equals one. Positive values represent harsher financial conditions than the average, and negative ones represent milder financial conditions compared to the average. An increase in the index indicates harshening financial conditions, while a decrease indicates milder financial conditions.

The development of the IFIS index was supported by the EIZ Club, Agrokor, Atlantic and Privredna banka Zagreb.