Comments from Dr Köhler-Geib

"Last week the ECB got serious: it initiated the interest rate turnaround. Because the spreads of Southern European countries have risen significantly as a result, the ECB's Governing Council held an ad hoc meeting today. In terms of content, the ECB has stuck to its decisions from last week but the meeting has nevertheless contributed to calming the markets, at least in the short term. A look at the fundamentals also shows that the situation is different today than it was at the time of the euro crisis: although debt levels in the affected countries are higher today, the decisive factor is that the interest burden is significantly lower relative to economic output. The declining long-term inflation expectations prove that the ECB is credibly implementing the interest rate turnaround from the market's point of view. The challenge remains to counter the market fragmentation with suitable instruments.”

"US Federal Reserve Chairman Jerome Powell has recently made it very clear that the Fed will continue its aggressive monetary policy turnaround until there are clear successes in the fight against inflation. A 0.5% increase in the key interest rate for both the upcoming June and July meetings seems to already be set in stone and the tightening of monetary policy will also continue at pace. In addition to the interest rate steps, the reduction of the USD 8.5 trillion Fed balance sheet has al-ready begun. In 2022, the reduction should add up to about USD 1.0 trillion, with a further reduction of USD 1.5 trillion expected for 2023. The Fed's balancing act is to slow down the price increases and at the same time not limit the economy too much through higher interest rates. Jerome Powell has already warned in this context that the fight against inflation could become painful."

“Against the background of inflation rates that have been well above the ECB's target of 2% for months, the ECB is likely to decide at its meeting on Thursday to discontinue the APP at the beginning of July. Moreover, a consensus has increasingly emerged in the Governing Council in recent weeks that a first rate hike in the following meeting at the end of July and an exit from the negative interest rate environment by the end of Q3 is in line with the monetary policy strategy. This view is now also shared by advocates of a looser monetary policy, such as ECB Governing Council member Fabio Panetta. According to this view, the economic and monetary policy circumstances for ending bond purchases and gradually leaving the negative interest rate environment are now given. The new ECB staff forecast is likely to include a downward revision of GDP growth this year compared to March and another upward revision of the inflation forecast for this year and next. The importance of the ECB taking countermeasures is shown by the fact that inflation expectations have risen well above 2% since the beginning of the war, which increases the risk of a wage-price spiral. If the ECB reacts too late, it will be even more difficult to push inflation back to its 2% target."

“Despite all the burdens posed by the war and the pandemic, business is still relatively good, but companies are very concerned about a decline. Never before was the discrepancy so high – among both SMEs and large enterprises – between the continuing positive assessments of the current business situation and the very gloomy business outlook since the outbreak of the war. That shows the abyss into which enterprises are looking. How deep they will really fall depends on how long the spiral of sanctions and escalation will continue to turn, but also on the duration of the war. What is particularly relevant for the economy is whether gas imports from Russia will stop. Two fundamentally opposing forces are currently acting on the business cycle: While the dampening effects of the pandemic are waning, Russia’s war of aggression is prolonging and exacerbating global supply chain problems, sending energy costs soaring and weighing on purchasing power. Consumption will therefore pick up in the summer half-year, but likely at a slow pace. In the winter half of 2022/2023 the economy will even almost stagnate. Assuming a stop of Russian gas supplies can be avoided, I assume that the German economy can still grow by 1.6% in 2022.”

“The Russian war of aggression is exacerbating disruptions in international supply chains and putting a strain on purchasing power, especially due to rapidly rising energy prices. All economic analysts have therefore revised their forecasts sharply downwards. Russia's offensive military and diplomatic actions are stifling hopes that the war could come to a quick end out of economic, political and military common sense or humanitarian concerns. It is therefore all the more remarkable that the situation on the German labour market has improved significantly. The number of job vacancies has risen to a record high and employment has even increased sharply in recent months. If the feared cut-off in Russian gas supplies does not materialise, the upswing on the labour market is likely to continue. One reason for this is the full order books in industry and the construction sector, another is the shortage of skilled workers, which again increased sharply at the beginning of spring, as the KfW-ifo Skilled Labour Barometer shows. Despite the Corona crisis and the Ukraine war, skilled workers have never been in such short supply in the last 30 years. 44% of all companies complained in April that their business activities were impaired by a lack of skilled workers. The baby boomers are gradually retiring from the labour market and the cohorts that are following them in the labour market are considerably smaller. The resulting gaps are large. This already places a heavy burden on the German economy when it comes to shaking off the coronavirus crisis, dealing with the consequences of the Ukraine war and advancing the necessary investments for the climate-neutral transformation of the economy, improving digital competitiveness and curbing the housing shortage in urban areas. Therefore, we must try to mobilise all employment reserves and thus all labour forces in Germany and attract additional ones through immigration. We also need more innovation and investment to make the available workforce even more productive.”

“The persistently high inflation rate in the euro area (May: 8.1%) has once again significantly increased the pressure on the ECB to accelerate the path of the interest rate turnaround it has embarked upon. In the ECB Governing Council and among a growing number of Executive Board members, this change of course is now already indicated for July: ECB President Christine Lagarde has recently emerged as the most prominent advocate of this change of course. In a speech, she described the discontinuation of the asset purchase programme (APP) at the end of June/beginning of July, a first interest rate hike at the Governing Council meeting at the end of July and an exit from the negative interest rate environment by the end of the third quarter as being in line with the ECB's strategy. A growing consensus of this view is also indicated by the remarks of ECB Governing Council member Fabio Panetta, who is traditionally seen as more of an advocate of looser monetary policy. According to him, the economic and monetary circumstances to end the bond purchases and to gradually leave the negative interest rate environment are now given. The importance of the ECB taking countermeasures is shown by the fact that inflation expectations have risen well above 2% since the beginning of the war, which increases the risk of a wage-price spiral. If the ECB reacts too late, it will be even more difficult to push inflation back to its 2% target.”

“The once hoped-for vigorous recovery is being choked off by the war. In contrast to what was expected before Russia’s attack on Ukraine, a broad economic recovery is unlikely before the inhibiting factors subside. Because of the war, energy prices will remain high over the longer term, weighing on purchasing power. Besides, even small COVID-19 outbreaks can always create additional global supply chain disruptions because of China’s strict lockdowns. I therefore expect only moderately positive quarterly growth rates in Germany for the rest of the year, and stagflationary tendencies are also quite possible.”

“The figures from the labour market and the KfW-ifo Skilled Labour Barometer are clearly showing that it would be a mistake to only focus on commodities and inputs from abroad as bottlenecks that hamper the recovery. The skills shortage, too, has a significant impact which will likely be even more severe, particularly in the long run”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Without a response, this will significantly hamper the growth potential of the German economy already by the middle of this decade. As far as addressing the shortage, it is already five minutes past twelve because the challenges have grown significantly. The accelerated energy and mobility transition, the need to catch up in digitalisation, the growing need for skilled workers in the health and care sector as well as in the areas of childcare and education, the housing shortage in metropolitan areas, the urgent need to invest in public infrastructure and the rising number of pensioners and retirees to be cared for are creating new demand for skilled workers. Germany therefore needs to improve and systematically implement its strategy for securing the supply of skilled labour without delay in order to meet these challenges”, said Köhler-Geib. “This includes making even more effective use of the labour force potential in Germany and further opening the labour market to immigration, particularly for non-graduate skilled workers, supported by intensive language training and simplified recognition of foreign qualifications.”

“Sentiment among German companies improves and has been much more stable since the Russian invasion of Ukraine than at the beginning of the Corona crisis in spring 2020. Unfortunately, however, a rapid catch-up movement as seen from early summer 2020 is currently also out of sight, because little remains of the consumption boom expected before the outbreak of war. Because of the war, energy prices will be high for a longer period of time and thus weigh on purchasing power. In addition, it can be assumed that China's strict lockdowns will cause repeated disruptions in global supply chains, even in the case of small Corona outbreaks. The supply chains are under additional stress anyway as a result of the war. For the rest of the year, I therefore expect only moderately positive quarterly growth rates; stagflationary tendencies are also quite possible.”

“Trade tax revenues have grown considerably of late – more than expected. But the saying that not all that glitters is gold applies here as well. The Ukraine war is creating administrative and financial strain for German municipalities. The revenues of many municipalities remain fragile while they are grappling with new pressures in the form of high energy costs, refugee accommodation and continuing increases in construction prices. As was the case at the start of the coronavirus crisis, the question is how sustainable and resilient municipal budgets are in the face of these new risks.”

KfW Municipal Panel 2022 (PDF, 106 KB, non-accessible)

“VC market sentiment virtually collapsed in the first quarter of 2022. This surely has something to do with the high rates of inflation and the sharp interest rate reversal announced by international central banks. Another factor is the geopolitical and economic uncertainty unleashed by the escalation of the war in Ukraine. However, we are coming down from a very high level, and the drop is less steep than the one triggered by the outbreak of the pandemic in the first quarter of 2020. This shows a state of shock over the events which is not yet reflected in broad investment activity. Around EUR 3 billion has already been invested in venture capital in German start-ups in the first three months, more than in the same quarter last year. And without mega-deals, which happen with varying degrees of frequency, we will only be just under the volume of the previous exceptional quarter. Investment activity in the VC market can be expected to remain steady, also because investors are still sitting on a lot of capital. Furthermore, the effect of the war on energy supply could even boost interest in clean and climate technology start-ups.”

“The interplay between positive and negative factors in the credit market will probably cause new lending to lose steam from the summer after solid growth in the first half-year. But the unpredictable impact of the war makes the further outlook for the credit market highly uncertain. A tightening of financing conditions is already becoming apparent, however. Against the backdrop of the war, banks will be reassessing default risks and then be more cautious in their lending. In addition, interest costs are rising again noticeably as a result of the gradual tightening of monetary policy.”

KfW Credit Market Outlook Q1 2022 (PDF, 181 KB, accessible)

“After the acute shock of the war in March, business sentiment stabilised in April. But businesses are breathing only a cautious sigh of relief after the collapse in the previous month. Current events such as the war which continues to rage unabated and new disruptions to global supply chains caused by strict lockdowns in China are making economic forecasts extremely unreliable right now. Containing Russia’s aggression, effectively mitigating the social burdens from inflation and sanctions, improving energy efficiency, rapidly diversifying energy supply and preparing early and systematically for a possible new coronavirus wave in autumn are key building blocks for stabilising the economy and growth.”

"The Ukraine conflict and the supply chain bottlenecks caused by the coronavirus pandemic are currently weakening industry and the energy sector in particular. Without an energy embargo, the German economy should still grow noticeably this year. But given the major downside risks, things could turn out differently. Rising energy prices led to record inflation in March and are lowering purchasing power. Real wages are expected to fall this year as inflation remains high. In Q4 2021, collectively agreed hourly wages rose by 1.1% – with inflation at 5%. The uncertain outlook of many companies limits the possibilities for wage increases. Unemployment and short-time work have still fallen until recently. Their further development will also depend on how the infection situation develops and how many refugees come to Germany from Ukraine this year and are registered at the job centres. In the case of short-time work, a stronger increase is possible if the number of coronavirus infections rises again in autumn and the expanded short-time work allowance should be extended again. If the short-time allowance expires as planned, unemployment could rise in autumn if there was a new wave of infections leading to greater losses in turnover in the retail and hospitality sectors. Without sufficient vaccination coverage and protective measures, this risk remains for the cold months. In order to be able to integrate the refugees seeking work as quickly as possible, it is necessary to provide them with sufficient German language skills, reliable prospects of staying, rapid recognition of vocational qualifications and, where necessary, further qualifications."

"This year, the US Federal Reserve faces the balancing act of capturing record inflation with a tighter monetary policy without running the risk of stalling the economy too much. As the past shows, such a "soft landing" is an extremely delicate undertaking. In the past 60 years, the Fed has only managed to do this once. For the coming months, therefore, a fine touch is called for but first it is a matter of decisively counteracting the recent rise in inflation expectations and preventing an escalation of the wage-price spiral. After the first rate hike of 0.25 percentage points was decided at the March meeting, a clear signal from the Fed in the form of an increase of 0.5 percentage points to 0.75 to 1.0% is expected for the coming meeting. This would be the first time since 2006 that the Fed has raised the key interest rate in two consecutive meetings. Further significant rate hikes are expected in the coming months and, in addition, the Fed plans to reduce its balance sheet by $95 billion per month – twice as fast as in 2017. The US monetary authorities are taking the situation very seriously and are about to change course sharply."

"The consequences of the Russian aggression are severe for the European economy. The slightly positive growth in the euro zone at the beginning of the year can therefore only provide short-lived relief. The Ukraine war is prolonging and intensifying the headwinds for the economy and robbing the economic recovery from the pandemic much of its strength. The worsening of China’s Covid-19 outbreak adds to the burden. High energy costs and supply bottlenecks are weighing particularly heavily on the construction and manufacturing sectors. Meanwhile, consumer sentiment is plummeting, a consequence of the significant loss of purchasing power and the uncertainty caused by the war. Only the lifting of the containment measures and fiscal relief packages remain as supporting factors for economic growth."

“In April, inflation as measured by the consumer price index (CPI) of 7.4% (HICP: 7.8%) was again well above the ECB's 2% target. Compared to the previous month, however, the pace of price growth slowed down somewhat. As in previous months, the biggest contribution to the high inflation rate came from energy prices. Intensified by the war, this is reflected above all in high prices at the petrol station but also in housing costs via the costs for electricity and gas included therein. In the meantime, however, prices in other categories are also rising significantly: food in particular already rose by 6.2% in the previous month of March compared to the previous year but services also increased strongly by almost 3%. The breadth of the current inflation push is also reflected in the fact that inflation, even excluding energy and food, was almost 3.5% in March. This increases the pressure on the ECB to accelerate the interest rate turnaround compared to the previous pace. High inflation hits low-income households particularly hard, as they already spend a particularly high share of their income on food, housing and mobility. Against this background, too, a timely, appropriate monetary policy response by the ECB is indispensable.”

“The unabated raging war, new disruptions in global supply chains due to the severe lockdown in Shanghai and the highest producer price increase since the founding of the Federal Republic are a major drag on economic sentiment. Nevertheless, companies have corrected some of the shock fall from the previous month in April. This fits quite well with the current economic forecasts, which, despite downward revisions across the board, still promise solid growth of a good 2 % on average for 2022. The fact is, however, that all forecasts are currently highly uncertain. Instead, we all think better in terms of scenarios and at the same time work hard to ensure that a good scenario becomes reality! Essential building blocks for this are the containment of Russian aggression, an effective social cushioning of the inflation and sanction burdens, a rapid diversification of energy supply, but also – and this is easily forgotten in view of the horror images of the war – a consistent preparation for a new Corona wave in autumn.”

“The war in the heart of Europe is weakening the economy through a massive increase in the cost of energy and worsening bottlenecks in the supply of materials, and it is generating enormous uncertainty. Financial institutions are therefore likely to reassess default risks and readjust their lending policy.”

KfW-ifo Credit Constraint Indicator April 2022 (PDF, 138 KB, accessible)

“In the March meeting, the ECB sent an important signal in the direction of price stability by maintaining its gradual tightening course despite the war. The real test is likely to come at the next meeting: Now that inflation has risen sharply again in March and there are signs that it will consolidate at a higher level in the short term, the ECB has no choice but to start tightening now. The ECB could implement this by announcing a complete end to bond purchases as early as the end of June and raising interest rates in Q3 2022 for the first time since 2014. Tighter monetary policy and higher interest rates do not fill pipelines and fiscal policy is more in demand to cushion the economic impact of the war. However, in the current inflation environment, only credible communication and decisive action by the ECB will ensure that long-term inflation expectations remain anchored.”

“As in Germany, inflation in the euro area remains high and rose significantly again in March. In the short term, prices are likely to consolidate at a high level, especially since energy prices, which had already risen sharply, have continued to rise strongly due to the Russian war of aggression. Beyond the short term, the ECB sent an important signal in the direction of price stability with its decision at the March meeting to maintain the gradual tightening course adopted in December despite the war. In the current situation, it has no choice but to start tightening now. It is true that higher interest rates do not fill pipelines, and fiscal policy is more in demand to cushion the blow. However, the ECB's actions ensure that long-term inflation expectations remain anchored. After all, these have started to move in the wake of the Russian invasion of Ukraine. In view of the extremely high level of uncertainty, the ECB's approach of proceeding gradually, thinking in scenarios and with flexibility seems to me to be appropriate for the current situation. This could also mean raising interest rates a little faster than previously planned."

“Economic expectations are currently characterised by extreme uncertainty. Speculation about the possible impact of a supply freeze of Russian natural gas and crude oil has given many companies a sense of crisis. A massive economic collapse is currently only an extreme scenario, but in any case the economic consequences of the Russian invasion of Ukraine are serious for Germany. If supplies were to be halted, scenario calculations suggest a recession, at least in industry. Without government support in the form of short-time working, a significant drop in employment in energy-intensive sectors would then have to be expected. For the economy as a whole, this could temporarily halt the rise in employment. If the supply freeze does not materialise, a muted economic recovery is likely from the spring. Unemployment could nevertheless rise slightly temporarily as a result of refugee migration and the discontinuation of extended short-time working benefits. But even without the embargo, there are serious risks. Inflation could continue to rise and become at least temporarily entrenched. In addition, a renewed upsurge in infections, hospitalisations and fatalities from omicron or new virus mutants is possible. The goal must be to reduce the high number of infections and severe illnesses. Increasing vaccination coverage must therefore continue to be a high priority. Caution must be exercised in relaxing infection protection.”

“Putin’s invasion of Ukraine is a taboo violation with dramatic humanitarian and geopolitical consequences as well as considerable risks for Germany, too. The very pronounced deterioration in SME business confidence in March was therefore foreseeable. The immediate effect of the war is first and foremost an additional surge in inflation from what is likely to be a longer-term increase in energy and commodity prices which will weigh on both household purchasing power and business activity in particularly energy and commodity-intensive sectors. But since Russia plays a secondary role as an export destination the loss of Russian demand will have less of an impact, while bottlenecks in critical commodities from Russia are potentially more severe but nearly impossible to predict. The economic impact will ultimately depend on the duration of the war and the spiral of escalation in military action and sanctions. In any case, the war and China’s new problems in containing the pandemic have stalled the momentum from the previously expected vigorous recovery.”

“As in other euro-area member states, inflation in Germany remains high and rose sharply again in March. Measured by the consumer price index (CPI), it rose to 7.3% (HICP: 7.6%) in March and could consolidate further at a high level in the coming months. As in February, energy prices are again likely to have been the main driver of this development. However, food prices, such as fresh vegetables, which had already become 11.1% more expensive in February, are also likely to have increased further. How strong inflation will be in the coming months and how long the current price pressure will last depends primarily on three factors: 1. the resilience of the German economy to sanction- and war-related disruptions of the supply chains in the wake of the Russian war of aggression against Ukraine; 2. the possibility of a gas and oil embargo including replacement and costs on the world market; 3. the speed and consistency of the ECB in implementing its chosen course of gradual monetary tightening. As long-term inflation expectations are also on the move in view of the renewed energy price increases since the beginning of the war, the ECB has no choice but to start tightening now. Its current approach of proceeding gradually on the basis of scenarios with flexibility seems to me to be appropriate in view of the enormous uncertainty caused by the war.”

“Municipalities are in catch-22 situation. On the one hand, they have to make a significant contribution to Germany’s transition to a digital, climate neutral economy and society, particularly by investing in an infrastructure that is fit for the future. On the other hand, the current environment is making such investments extremely difficult.Price increases are colliding with narrowing budgetary leeway, and municipalities can benefit from low interest rates only to a certain extent as there are limits to borrowing and the very favourable lending conditions cannot stay in place forever. This situation illustrates the need to strengthen the capacity of municipalities at a structural level, including by adding a reliable pillar that generates strong revenues to improve municipalities’ finances. Only when municipalities are able to plan activities on the back of continuous and sufficient revenues can they implement the necessary investments on a sustained basis. And only then can municipalities take up more loans to finance investment and put them to use effectively."

“Corporate sentiment collapses! Under the cannon thunder of the Russian war of aggression in Ukraine, only this one outcome was even conceivable. This war, which seems to have fallen out of time, is bringing unspeakable suffering and death to far too many people – that is as upsetting as it is clear. Far less clear, however, are the effects on the economy. They depend strongly on the duration of the war and the further turning of the spiral of military and sanctions escalation. The war will definitely take a lot of momentum out of the previously expected recovery but without necessarily leading into recession. After all, with the removal of the majority of Corona restrictions, services have considerable recovery opportunities as a counterweight to the war-related burdens, especially with a view to spring and summer. A precondition, however, is that an energy embargo against Russia is avoided.”

“Germany’s progress in digitalisation is only average. Russia’s war against Ukraine has made painfully clear how quickly abstract risks can turn into concrete threats. In the field of digitalisation, the war has exacerbated the threat situation from cyber attacks. We must be aware of how heavily dependent we are of commodities and how intensely global competition for them is evolving. Germany cannot afford any weaknesses in digitalisation. It is, rather, a building block for securing our prosperity and freedom into the future. So the fact that the coronavirus pandemic has boosted digitalisation is a good thing. More businesses have switched from emergency digitalisation measures to strategic realignment. The task of economic policy is to support businesses so that this boost turns into a sustained trend.”

KfW SME Digitalisation Report 2021 (PDF, 1 MB, non-accessible)

“Before the outbreak of Russia's war of aggression on Ukraine, the situation was clear for the US Federal Reserve. Price pressures have increased across the board in the US in recent months, with inflation now at an astronomical 7.9%. Meanwhile, the US labour market continues to. In February, the unemployment rate fell to 3.8%, the lowest level since the beginning of the pandemic. The tight labour market and the danger of a faster wage-price spiral increase inflation risks. So it is high time for the Fed to react, even if the escalating conflict in Eastern Europe has also led to increased uncertainty in the USA with regard to further economic development. However, the direct economic effects are much smaller than for the euro area and so the US Federal Reserve will raise the key interest rate again for the first time on Wednesday, more than two years after the start of the pandemic. However, a large rate hike of 50 basis points seems to be off the table due to the current uncertainties, which is also confirmed by recent statements by Fed Chairman Powell, who spoke in favour of a hike of 25 basis points.”

“Despite the Russian war of aggression on Ukraine, the pressure on the ECB to continue its course of gradual tightening of its monetary policy is high. After all, in view of the renewed energy price increases since the start of the war, long-term inflation expectations have also risen noticeably. In any case, the ECB is likely to send the signal this Thursday that flexibility is the order of the day in view of the uncertainty about the economic impact on the euro area. With a view to providing liquidity to banks and financial market stability, it will convey that it is capable of acting at any time and can also react at short notice. For the new ECB staff forecast, I expect a downward revision of GDP growth this year and another upward revision of the inflation forecast for this year and next. Against this backdrop, the ECB will probably keep a firm eye on the exit from the bond-buying programmes by the end of the year and gradual interest rate steps thereafter”

“The German economy is still burdened by Omicron work stoppages, high energy and raw material prices and continuing supply chain problems but most companies expect an improvement soon and are continuing to hire. This has caused employment to rise sharply in recent months. If things continue like this – and the expected decline in new infections suggests they will – employment will return to pre-crisis levels in the spring. The same applies to the number of unemployed persons. The economic impact of the war in Ukraine and the sanctions imposed on Russia are likely to weigh on companies and private households in Germany via higher oil and gas prices. But it is unlikely that this will be enough to prevent the upturn in employment in the spring. The prospects for the labor market are therefore good in the short term, especially as dependence on Russian gas is also reduced somewhat in the warmer months. In the medium term, however, new shortages of raw materials and possibly even rationing of gas supplies also pose risks for the labor market.”

“The Russian invasion of Ukraine on 24 February 2022 marks a turning point for Europe. On the one hand, geopolitically and strategically, but also with regard to the question of how to reduce the high dependence on fossil fuels and thus on suppliers such as Russia. It is this dependence, especially on gas and crude oil imports, that has caused inflation to rise in almost all member states of the euro area during the past six months. In addition, food prices have risen significantly in recent months. This trend continued in February; measured by the harmonised consumer price index HICP, the year-on-year inflation rate was 5.8%. The Russian war of aggression is likely to continue to determine the development of gas and crude oil prices in the coming months and counteract a gradual decline in energy prices. However, it is still unclear whether they will continue to rise in the coming months or stagnate at a high level. In any case, the international sanctions will also increase the risk of new price rises. In view of the changed framework conditions, the ECB is likely to continue to pursue its current course in the coming week, leaving further options open with a steady hand. However, there are likely to be only gradual changes to its exit perspective from the expansionary monetary policy, above all a scaling back of the bond-buying programme this year and subsequent communication on the interest rate turnaround.”

“February 24, 2022 marks a turning point. Geopolitically and strategically, and also with a view to the economic policy design of our energy mix. After all, it is precisely the German economy's high dependence on fossil fuels that was one of the main reasons why consumers are now clearly feeling the effects of the inflation rates, which have been rising steadily for almost a year. This trend also continued in February, with the year-on-year inflation rate measured by the CPI consumer price index at 5.1% (HICP: 5.5%). The development of gas and crude oil prices is likely to remain decisive for the development of German consumer prices in the coming months. The Russian war of aggression in Ukraine is counteracting a gradual stabilization of energy prices and a gradual decline in the high inflation rates. Instead, the international sanctions put in place as a result of the Russian invasion of Ukraine are increasing the risk of new price rises.”

“Russia’s aggressions and the sanctions imposed in response hang over the further economic recovery of Germany and the euro area like a sword of Damocles”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “More than anything, open warfare in Ukraine is having dramatic humanitarian and geopolitical consequences, besides further driving energy prices and inflation in the euro area. This will affect Germany in a particular way as it covers around 14 % of its final energy needs with Russian natural gas alone. Besides moderately affecting economic output through loss of purchasing power it will also disrupt energy-intensive production, especially if the need arises to ration energy supplies. At this stage, the impact on German and European economic output is almost impossible to predict. Now anything can happen – from another recession to around 3 % growth."

“The rising mood in companies gives hope for an economic recovery, but the sword of Damocles of an escalating Russia-Ukraine conflict now hangs over it. The fear of war in Europe is in the air – with potentially significant effects on energy supply and energy prices, among other things. At the same time, however, February also offers good news: the peak of the Omicron wave has probably been passed without too many sharp restrictions and clear opening perspectives for the economy are emerging. Basically, I therefore see our economic picture confirmed: We expect a growth spurt from spring onwards, initially driven by consumer-related services and then increasingly by industry as well. This assumes, however, that an armed conflict remains limited to the Donbass."

“The current KfW-ifo SME Barometer illustrates that although many SMEs deplored a further deterioration in the business situation at the start of the year, they also hold a much more optimistic view of the near future again. That gives us a foretaste of spring. Overall, the Omicron wave appears to have had less of an impact than was feared in December. But work absences due to infections is still likely to cause some problems. Most of all, however, hope is growing that the pandemic situation will end in the course of the year.”

KfW-ifo SME Barometer January 2022 (PDF, 141 KB, non-accessible)

“The ongoing weakness in credit demand is in line with expectations. Supply bottlenecks and the new Omicron variant have disrupted economic activity and are weighing on investment sentiment. On the other hand, higher prices for materials, inputs and investment projects are driving businesses’ financing requirements, as are new pandemic-induced liquidity gaps. Still, these effects are too small for a clear trend reversal in credit demand.”

KfW-ifo Constraint Indicator February 2022 (PDF, 124 KB, non-accessible)

“At the first meeting of the ECB Governing Council in the new year, no new decisions are likely to be taken for the time being. This is mainly due to the economic uncertainty associated with the omicron option and the geopolitical tensions with Russia. The Fed and the Bank of England have already noticeably initiated monetary tightening because inflation there is driven more by rents and wages. Overall, this tightening is likely to increase the pressure on the ECB in the course of the year to consider interest rate steps earlier than previously announced. The ECB will be paying very close attention to the extent to which the high rise in energy prices spreads to other areas of the economy. It is crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account further inflation developments. The strong catch-up growth of the euro zone in 2021 points to a solid recovery. This argues for the discontinuation of all ECB purchase programs at the end of the year as an important step in the right direction.”

“The first data point of the new year shows a renewed increase in the inflation rate, which is primarily explained by the passing on of very high energy prices to consumers. Over the course of the year, the monthly inflation rate is still expected to fall. However, how quickly it does depends on how quickly supply bottlenecks and energy prices ease. The omicron option in particular makes new supply chain disruptions more likely. In any case, if there is no noticeable downward trend in the inflation rate, the pressure on wage negotiations to reach higher agreements will increase and with it the risk of second-round effects. In this case, I expect monetary policy to react earlier than currently communicated. In any case, the complete discontinuation of the ECB's purchase programs at the end of the year is an important step in the right direction. It is crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account the further development of inflation.”

"The spike in infection figures is likely to put further downward pressure on economic activity in the coming months. For the winter half-year, we expect a technical recession with two negative quarterly growth rates. In this difficult period, the labour market is once again proving to be an anchor of stability for the German economy. The experiences in South Africa and the United Kingdom give us hope that the forthcoming omicron wave will be over in a few months. With the prospect of an upturn in the spring, many companies are continuing to hire. Competition for scarce workers has intensified as a result. This should cause employee earnings to rise more strongly again and, together with the forthcoming pension increases, support overall economic demand. However, the fundamental wage restraint since the outbreak of the pandemic is likely to remain, as many companies are still feeling the financial burdens of the past two years. All in all, the signs on the labour market thus far continue to point to recovery. However, the crucial prerequisite for a sustained upturn is that we get the coronavirus pandemic under control. To do this, we need to vaccinate at full speed. The more people cooperate, the more successful this will be.”

“Following the rapid price increases in the past year, the further development of the inflation rate in Germany is subject to great uncertainty. On the one hand, the elimination of special and base effects from 2020, but also the cooling of economic activity associated with the omicron variant initially counteract a further rise in prices. This is also reflected in the data published today on the inflation rate for January, which measured by the CPI consumer price index was 4.9% (HICP: 5.1%). On the other hand, the decline has been limited by factors such as the continuing unresolved supply bottlenecks and rising energy prices, geopolitical tensions with Russia and the Chinese government's strict no-covid policy. These could continue to generate inflationary pressure in the coming months. If this persists well beyond the first quarter of 2022, the decline in inflation rates will also slow. Additional price pressure could also come from the labor market if high inflation rates continue to be reflected in higher wage settlements. In this case, I expect monetary policy to react sooner than currently communicated, for example by completely discontinuing its purchase programs as early as the end of the year. In view of all the uncertainties, it is crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account the further development of inflation.”

"The verdict of the past year is positive for the eurozone. Strong growth enabled the monetary union to loosen the grip of the pandemic and close the gap to pre-crisis levels. The key to the successful recovery was the broad-based vaccination campaigns, the fundament was the financial stabilization of households and companies achieved by the comprehensive economic policy packages. Nevertheless, economic activity will remain influenced in the short term by the ups and downs of the infection waves. However, I am optimistic that the influence of the virus continues to fade and Europe can then face the enormous challenge of transformation with all its might.”

"The real surprise came already in mid-January when the Federal Statistical Office indicated a significant decline in economic output in the autumn quarter and at the same time implicitly pointed to substantial upward revisions in the previous quarters with the annual rate of 2.7% reported at that time. In particular, licensing income from Biontech, recorded for the first time, probably shook up the growth statistics. Then, at the end of the year, the pandemic dragged the economy down again, with the hospitality industry, for example, seeing its all-important Christmas business severely curtailed. The quick release for the fourth quarter published today is also prone to revision, as data from December is still missing. For the autumn of 2020, for example, quasi-stagnation (+0.1%) was originally reported, which ultimately turned into very decent quarterly growth of +0.7%. Ultimately, however, year-end 2021 is likely to remain in the red, and a further decline is also likely in the current quarter before growth picks up again in the spring.“

"The U.S. economy grew by an annualized 6.9% in the fourth quarter. For the year 2021, this results in a GDP growth of 5.7%. Extensive fiscal spending and a very loose monetary policy have contributed to the situation that US economic output is now well above the pre-crisis level. Washington and the Fed are increasingly turning away from crisis mode in view of the good economic development. The government's fiscal support will be much smaller in 2022 than in previous years. The Fed has already begun to scale back its expansionary monetary policy. Rising interest rates and an increase in the cost of financing for companies are therefore to be expected. Economic development in 2022 will therefore be characterised by fading catch-up effects and a normalisation of the growth rate. We expect stable GDP growth of 3.8%.“

“With the first brightening of the business climate in seven months, the economic start to the new year has been successful, at least in terms of sentiment. Companies finally see light at the end of the tunnel – and rightly so! A “technical recession” in the winter half-year 2021/2022 can hardly be avoided. But the renewed pandemic-related phase of weakness should be over in the foreseeable future. A strong growth spurt is likely to follow as early as spring, driven by the recovery of consumer-related services and then increasingly by industry as the year progresses. Hopes rest on an overcoming of the pandemic in the course of the year and significantly fewer disruptions in the global supply chains.”

"The Fed, unlike the ECB, pursues a dual mandate. The Fed's mandate is to maximise employment while keeping prices stable. The US labour market is performing well, with the unemployment rate at 3.9% in December further approaching the pre-crisis level of 3.5%. This allows the Fed to focus on the fight against rising prices. The inflation rate in December was 7.0%, the highest level since 1982. To counteract this development, the Fed announced the end of the bond-buying programme in March, and in the December meeting it also signalled the prospect of three interest rate steps in 2022. Some members of the Fed's Open Market Committee have recently advocated that the first hike should take place in March. The press conference following the January meeting will probably be used to prepare this step. In addition, the reduction of the Fed's balance sheet of almost USD 9 trillion will be discussed. I think it is possible that the reduction will already begin in the summer.”

“The very high expectations placed in the German economy at the beginning of 2021 were only partially fulfilled. The exceptionally stubborn global supply chain problems, two further Corona waves and a rise in inflation that eroded purchasing power ultimately prevented a faster recovery last year. Taken on its own, the economic growth of 2.7% reported for 2021 is nevertheless respectable; since reunification it has averaged only 1.2% per year. The economic stabilisation despite new hurdles caused by the continuing smouldering pandemic is also due to the fiscal effort, as reflected in the high government deficit of 4.3% of GDP. The task now is to reduce the government debt again in perspective and at the same time channel sufficient resources into the upcoming transformation. This difficult balancing act is best achieved with solid economic growth and close monitoring of expenditure quality and efficiency. The outlook for economic growth is generally favourable, but the risks are high, especially in the short term. As in 2021, there is the threat of an economic rollercoaster ride over the peaks and valleys of new Corona waves. With the highly contagious Omicron variant, the pandemic will again cause an economic false start, but this may be followed by a strong growth spurt from the spring onwards. The prerequisite is the successful control of the pandemic – ideally its transformation into an endemic – as well as an easing of supply bottlenecks.”

“The last data point of 2021 did not bring the slowdown in price growth expected in the expert survey. The inflation rate rose for the sixth time in a row in December to now 5.0%. This year, it is to be expected that the inflation rate will fall again due to the elimination of special effects. But how fast it goes depends on overcoming supply bottlenecks and energy prices. Unfortunately, the omicron variant makes new supply chain disruptions more likely, even if a further tightening of the pandemic situation could cool price pressures somewhat for the time being. In any case, if a noticeable downward trend in the inflation rate fails to materialise, the pressure on workers to seek higher wage settlements will increase and with it the risk of second-round effects. It is therefore crucial that the ECB keeps a close eye on this development and clearly and reliably communicates the prospects for an interest rate turnaround in light of further inflation developments. The announced reduction in securities purchases was an important step in this direction and appropriate both from a monetary policy perspective and with a view to the economy, despite all the uncertainty.”

“In the year just ended, inflation has increased a lot. It has reached new heights every month since the beginning of the year, with the exception of a short pause in June. In December, the inflation rate, as measured by the consumer price index CPI at 5.3% (HICP: 5.7%), is climbing to another high point. As with mountain climbing, the question that arises when looking at inflation is whether the descent awaits after the summit or a further, hitherto unexpected rise. Both are conceivable: there is much to suggest that price growth will cool off as a result of the elimination of base effects but also due to a renewed intensification of the pandemic situation. At the same time, it remains uncertain how quickly the acute supply shortages on the energy markets and the supply bottlenecks will ease. If these persist well beyond the first quarter of 2022, the decline in inflation rates is also likely to slow. In this case, the pressure on the collective bargaining parties, which is still low due to the pandemic, will increase and could result in higher wage agreements. It is therefore crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account further inflation developments. The planned reduction in its purchasing programs was an important step in this direction and, despite all the uncertainty, appropriate both from a monetary policy perspective and with a view to the economy.”

"The labour market balance at the turn of the year is mixed. On the plus side, the labour market situation improved rapidly: Unemployment has fallen to the end of the year. At 2.3 million, the number of unemployed persons is almost 400,000 lower than in the same month of the previous year. The number of short-time workers has fallen from 6 million in April 2020 to 700,000 in October 2021. There are 800,000 job vacancies currently registered with the Federal Employment Agency, the highest number in two years. These figures are encouraging. But the recovery on the labour market is still on shaky ground. On the debit side – followed by the shortage of skilled workers – is Omicron. The new viral mutant will become another severe test for the German economy. The outlook for the economy and the labour market is therefore highly uncertain for the next few months. Many companies and jobs are still being supported with extensive subsidies. It is right for companies and jobs to be preserved for a limited period of time in a state of emergency. But the support must be phased out in good time and the companies must be able to operate under their own steam again. The overriding goal must therefore be to combat the virus on a broad front. Vaccinating as many people as possible worldwide – if necessary with adapted vaccines – holds out the only hope of ending the state of emergency in the new year."

“The Omicron variant is overshadowing the recovery in the credit market. The prerequisites for more vigorous investment and lending activity are generally fulfilled in 2022, especially on the back of the strong order volume in the manufacturing sector and continuing favourable financing conditions. Besides, investments were deferred during the pandemic, so that catch-up effects must be expected. But now Omicron has plunged us into uncertainty again, particularly with respect to the course of the recovery. At present I do not expect credit growth to speed up again until the second half of the year.”

KfW Credit Market Outlook December 2021 (PDF, 128 KB, non-accessible)

“Dark clouds are gathering on the economic horizon this winter and darkening the outlook for 2022. That is the anxious message with which the KfW-ifo SME Barometer is ending the second year of the coronavirus pandemic. The Omicron variant is threatening to derail the economy yet again. What is likely is that Germany’s economic output will shrink at the beginning of 2022 because the industrial sector cannot act as a sufficient counterweight to the affected services sector for now due to persistent material bottlenecks. But with likely vaccine mandates, warmer weather and modified vaccines coming, there is reason to hope that the situation among service providers will ease in the second quarter. However, new global supply chain disruptions will also become more likely if Omicron leads to closures of production facilities or logistics hubs at major trading partners and the turnaround in the manufacturing sector is delayed. China, which will probably stick to its strict zero-COVID policy, is particularly critical in this regard. Overall, the economic dip in the winter half-year will probably be deeper than was expected just a few weeks ago, and the subsequent recovery will move at a slower pace at first.”

KfW-ifo SME Barometer December 2021 (PDF, 100 KB, non-accessible)

"The mood continues to cloud over, since just as the delta wave is finally beginning to break, Omikron threatens another setback. Because of its higher transmissibility, a resurgence in new infections and hospital burden is likely to be halted only with additional containment measures. How comprehensive they must be, however, depends on many unknowns. More benign scenarios are possible. At present, however, it is more likely that German economic output will contract at the beginning of the new year, but that the upswing will then continue from spring onwards. Contact-intensive service sectors in particular, such as the hospitality sector, are likely to be hit hard again. However, global supply problems could also be prolonged if important trading partners close production facilities or logistics hubs. China in particular is critical here, as it is likely to maintain a strict zero-covid policy."

“In a hearing before the U.S. Congress, Federal Reserve Chairman Powell warned of continuing inflationary pressures and held out the prospect of increasing the speed at which the bond-buying program will be scaled back from the beginning of 2022. He is expected to officially announce this move after the upcoming December FOMC meeting. The meeting will also focus on whether the Fed will raise the key interest rate as early as next year. This prospect increases the tension for the new inflation forecasts of the U.S. central bank. These will be published at the same time. Powell had recently dropped the word "transitory" from his vocabulary with regard to price increases. In contrast to the Fed, the ECB has so far maintained its communication that the current higher price increases are a largely transitory phenomenon. However, several ECB Council members recently expressed the view that higher inflation rates are likely to be more persistent than still assumed until the summer months of 2021. The new staff forecasts, which for the first time include a data point for 2024 will be presented at the upcoming December meeting, are therefore of great interest. The medium term, i.e. 2023 and 2024, will be particularly important. If inflation rates here sustainably approach the 2% targeted by the ECB, this may result in a time window for interest rate steps and a gradual discontinuation of the purchasing programs. If the Fed holds out the prospect of interest rate steps in the coming year, the pressure on the ECB will also increase to announce the monetary policy turnaround in its communication.”

“It is encouraging that 12% of SMEs are investing in climate action, especially when we also consider that a large portion of companies have not yet invested at all. Given the scale of the challenge of the transition, however, it is clear that much more actually needs to happen here. One fourth of small and medium-sized enterprises currently have climate action on their agenda. Conversely, however, this also means that three in four companies did not complete any investment projects with a focus on climate action last year nor plan to in the foreseeable future. Given the high overall volume of expenditure required to reach the goal of climate neutrality, investment momentum needs to speed up noticeably in the SME sector as well.”

“Small and medium-sized enterprises in particular are likely to require further advice and support when developing climate action and climate change adaptation strategies. Not least, an adequate financing and support framework needs to be established for such investments. Climate action investment makes SMEs fit for the future. For one thing, businesses that take the lead on climate action have competitive advantages in the long term as carbon prices rise and customer behaviours change. For another, climate-friendly products and processes are growth markets of the future. That ensures opportunities for growth and employment.”

German SMEs invest EUR 22 billion in climate action to remain viable and competitive (PDF, 261 KB, non-accessible)

“The current KfW-ifo SME Barometer reflects a considerable downturn in business confidence. Owing to the critical pandemic situation and persistent supply bottlenecks, economic output is set to drop slightly or at best stagnate during the current quarter. Looking ahead, what matters most is how dangerous the newly detected Omicron variant is. Incidence levels are trending slightly downwards, to be sure, and the measures adopted by the most recent conference between the federal and state governments have hit most service sectors less hard than the broad lockdown last year. Should Omicron indeed be significantly more contagious than Delta and cause more severe illness even among vaccinated persons, a renewed broad shutdown in many services sectors would have to be expected. Global supply problems could also intensify if major trading partners end up closing production facilities or logistics hubs. China, which will continue its strict zero-COVID policy, is particularly critical in this regard.”

KfW-ifo SME Barometer November 2021 (PDF, 145 KB, non-accessible)

“Part of the growth will shift to next year, and Germany’s gross domestic product will remain slightly below the pre-crisis level of the final quarter of 2019, by a good one per cent. But as the saying goes, all is not lost that is delayed. The German economy will grow above its pre-crisis level in the second quarter of 2022 – and it will do so quite quickly and noticeably once the inhibiting factors are resolved.”

“As this enormous order backlog is reduced, a new growth surge is foreseeable in the course of 2022 as soon as the material shortages ease. Once the fourth wave of the pandemic has been contained, consumption demand will also pick up again in the course of 2022, especially since private households have considerable excess savings which will also allow them to at least mitigate losses in purchasing power due to higher energy prices. From the first quarter of 2020 to the third quarter of 2021, the domestic savings ratio averaged 5.8 percentage points above the average of the previous ten years, which amounts to combined excess savings of EUR 208 billion or 6.2% of GDP of 2020.”

KfW Business Cycle Compass November 2021 (PDF, 90 KB, non-accessible)

"Supply and material bottlenecks have put the brakes on the upswing for the time being and the number of people infected with Corona has again soared to a worrying level. In view of these setbacks, all economic analysts have revised their forecasts for the current year significantly downward. Despite the subdued expectations, there is one bright spot: The German economy is on the road to recovery. This is particularly evident on the labour market: Companies are hiring more again. Companies looking for workers have reported more than 800,000 vacancies to the Federal Employment Agency. This means that the number of vacancies has almost reached a record level. Despite the economic uncertainty, I therefore expect unemployment to fall further in the coming months. The shortage of skilled workers is particularly serious. In October, 43% of the companies surveyed in the KfW-ifo Skilled Workers Barometer reported that their business activities were hampered by a lack of skilled workers. This is the highest level to date. In industry, never since reunification have so many companies seen themselves hampered by a shortage of skilled workers as at present. This clearly shows that the shortage of skilled workers is becoming a problem that business and politics urgently need to pay more attention to."

“Measured by the consumer price index (CPI), inflation was 5.2% year-on-year (HICP: 6.0%). The last time there was an increase of this magnitude was during the reunification boom in 1992. However, the situation at that time was different. At present, between 1.3 and 1.5 percentage points of the increase in November alone are likely to be due to the reverse base effect of temporary VAT cuts and changes in the weights in the basket of goods. These effects drop out of price measurement at the start of the new year, which will dampen the rate of inflation from January. In addition, the sharp rise in energy prices over the past few months and the as yet unresolved difficulties in the supply chains are driving inflation up further. For the coming year, however, I see light at the end of the tunnel. It is very likely that inflation will gradually decline and fall below the 2% mark again in the middle of the year. With regard to monetary policy, a steady hand is called for. Against the background of the predominantly temporary and also supply-side effects, short-term tightening measures would, on the one hand, fizzle out. On the other, they could hamper the still incomplete economic recovery in Germany and the euro zone. However, I believe it is crucial that the ECB keeps an eye on the turnaround in interest rates, communicates this and pursues it consistently, taking into account the further development of inflation. In this way, it can continue to ensure monetary dominance.”

“The decline in the ifo business climate was expected in view of the rapid increase in the number of infections. The pandemic development is particularly depressing because it will lead to a new peak occupancy rate in intensive care units, which a higher vaccination rate would have easily avoided. For some businesses, however, such as those in the catering or event industry, the foreseeable loss of turnover is also painful. Although politicians would like to avoid general shutdowns at all costs, some virologists warn that in many places an extreme overload of the health system can only be prevented with general contact restrictions and the closure of nightlife. A look at Austria also shows that far-reaching lockdowns are again possible as a last resort. After all, there is now a chance that a third vaccination could contribute to a significant easing of the pandemic situation this winter. For this to happen, however, politicians must ensure a massive expansion of vaccination opportunities as soon as possible.”

“The current KfW-ifo Skilled Labour Barometer shows that the German economy is dealing with more than just material shortages and supply bottlenecks. The skills shortage is hampering businesses to a far greater extent than before the crisis. The lack of skilled personnel is threatening the further recovery and growth in the coming years. What direction the skills shortage takes will crucially depend on whether and to what extent the participation of Germans in the labour force and skilled migration grows again and to what extent skilled personnel can be qualified in line with demand through training and education.”

KfW-ifo Skilled Labour Barometer 4th quarter 2021 (PDF, 131 KB, non-accessible)

“The currently steady SME business sentiment brings a small ray of hope to the otherwise rather dim economic outlook at the beginning of the autumn quarter. But the rapid rise in new infections since the end of October shows that the pandemic continues to bite in Germany as well.” With the arrival of the cold season people are moving indoors again, which increases infection risks. Contact-intensive service businesses could suffer if consumers choose to stay away. “The persistent material bottlenecks and fast rising energy prices, particularly since late summer, are affecting SMEs to a similar degree as large enterprises”, added Köhler-Geib. “But even if materials and inputs are anticipated to remain in tight supply for some time to come, any improvement to the supply situation can generate growth. After a dip in economic activity in the winter half-year, I expect a new growth surge in the course of 2022 as soon as the supply-side disruptions subside.”

KfW-ifo SME Barometer October 2021 (PDF, 147 KB, non-accessible)

„In September, the US inflation rate showed for the fifth time in a row a five before the decimal point. Although the Fed continues to point to temporary effects, the US monetary watchdogs have also observed that there have recently been significant price increases in cyclical components as well. The Fed is despite the recent weaker-than-expected labour market recovery under increasing pressure to initiate a turnaround in monetary policy. It is therefore expected that the monetary watchdogs will decide to reduce bond purchases at their November meeting. So far, the US central bank has been buying bonds worth USD 120 billion per month. The FOMC meeting minutes from the September meeting indicate that a monthly reduction of USD 10 billion in government bond purchases and USD 5 billion in mortgage bond purchases can be expected. At this pace, the bond-buying programme would end in June 2022. I expect the first interest rate step towards the end of 2022.”

“The summer brought strong quarterly growth of +1.8%, especially as people again went out to restaurants or to cultural and sporting events, for example, or used personal services or travelled more frequently after most Corona-related restrictions were lifted. However, without the stubborn material bottlenecks that restricted the producing sector in particular, the growth in economic output could have been even higher. Unfortunately, the supply-side distortions will probably only ease next year. At the same time, the catch-up movement in consumption loses momentum with the onset of the cold season, also because many people are likely to voluntarily limit their demand for contact-intensive services in view of continuing infection risks. Added to this is the steep rise in energy prices, which reduces real purchasing power and creates cost pressure on the corporate side. Therefore, I expect quarterly growth to be much weaker in the final quarter of 2021. But the recovery is only postponed, not cancelled. With record industrial order books and exceptionally high household savings, I expect a strong growth spurt in the course of 2022 once the supply-side dislocations subside. What we will see in autumn and winter is just a dip in the economic cycle!”

“The strong comeback of services has given a powerful boost to economic output in the euro area. At the same time, disrupted supply chains in the industrial sector have weighed less on production than in Germany. As a result, the precrisis level is within reach. However, with the lifting of most Corona measures, the potential for rapid improvements in the economic situation has now been exhausted. At the same time, the recovery is being held back by an unpleasant combination of rapidly rising energy prices, persistent shortages and local waves of infection of varying severity. A year-end spurt in growth will therefore fail to materialise.”

“The labour market has so far proved resistant to the production downturns in industry and the construction sector. But the risks to the further upturn are considerable: Thus far, it has been difficult to predict how long the material bottlenecks and production disruptions on the world markets will last. The resulting supply difficulties and sharp price increases for key raw materials and intermediate goods are delaying the emergence from the crisis. The further recovery will therefore be more sluggish than expected in the spring. But postponed does not mean cancelled. Due to pent-up demand following the crisis-related production losses, the order books in industry are well filed. In residential construction, too, order backlogs are at a historically high level due to the high demand for new buildings in conurbations. This means that high production increases can be expected as soon as the bottlenecks are overcome. If the situation eases by the end of the year, unemployment could fall further in the coming winter, at least on a seasonally adjusted basis.”

“Measured by the consumer price index (CPI), inflation was 4.5% year-on-year (HICP: 4.6%). A significant part of the increase in recent months is mainly due to the economic aftermath of the pandemic and will recede in the coming year. However, there are currently also upside risks emanating from the supply side. The overall picture is made up of various influencing factors: First, statistical base and special effects, for example from the oil price or the German VAT cut in H2 2020, only affect price measurement until the end of 2021. This dampens the inflation rate from 2022. Second, the current supply bottlenecks. Here there is uncertainty as to how long they will remain an additional, price-driving factor in the industry. If they persist well into 2022, this is likely to have a negative impact on economic growth and will also be felt in consumers' wallets. Thirdly, supply-side effects are likely to keep energy prices high over the winter, pushing inflation towards 5% in the last two months of the year. For 2022, I expect inflation to gradually decline and fall below the 2% mark again in the middle of the year. Against the backdrop of both temporary and supply-side effects, short-term tightening measures with a view to inflation would fizzle out. However, I believe it is crucial that the ECB keeps an eye on the interest rate turnaround in the medium term and follows it up.”

“After double-digit growth rates at the beginning of this year, growth in the broad monetary aggregate M3 in the euro area is falling back to a level similar to that at the start of the pandemic (7.4%). Growth rates are also likely to remain in single digits in the coming months, especially after the ECB announced at its September meeting that it would buy "significantly less" in Q4 than in the two preceding quarters. This will have little impact on the currently heightened inflationary pressure: For one thing, price increases are largely driven by supply-side factors which are beyond the control of the central bank. For another, M3 growth remains well above the average of the pre-crisis years. More housing loans and government bonds on bank balance sheets are primarily responsible for this development, while growth in corporate loans plays only a minor role after strong contributions at the beginning of the pandemic.”

“In light of the crisis, it is understandable that SMEs are reluctant to invest. That needs to change urgently. The transformation to a climate-neutral and sustainable economy is on the agenda, and many businesses have much catching up to do in digitalising operations. In order to manage this, they will have to show the same strengths that have brought them through the crisis. Policymakers have to provide a reliable economic policy framework and give them targeted support in carrying out necessary investments.”

KfW SME Panel 2021 (PDF, 873 KB, non-accessible)

“The economy is taking a dip, as evidenced by the increasingly cool mood among companies. After a strong increase in the summer, quarterly growth will be much weaker in the autumn. Key risk factors have become reality: material bottlenecks and disruptions in the global transport system have been a burden for longer than originally expected and will probably only ease in the coming year. Added to this is the recent sharp increase in energy prices, which is reducing real purchasing power and creating additional cost pressure in companies. With the onset of the cold season, life is also shifting more indoors again, which is why more cautious people may voluntarily hold back on contact-intensive services in view of the ongoing pandemic. But the recovery is only postponed. The backlog of industrial orders is at a record high and private households have saved an unusual amount of money during the pandemic. I therefore expect a strong growth spurt in the course of 2022 once the supply-side disruptions subside.”

“I expect below-average credit demand to continue in the months ahead. The economic recovery and government subsidy payments of now more than EUR 50 billion have improved companies’ financial position. Businesses also deposited unusually large amounts in bank accounts during the coronavirus crisis. Companies can use this liquidity for upcoming financing requirements, for example for investment expenditure. On the supply side, I see little scope for improving credit access. The persistent disruptions to global supply chains and the steep rise in energy costs are relevant risk factors which financial institutions are likely to be increasingly mindful of in their lending decisions.”

KfW-ifo Constraint Indicator October 2021 (PDF, 111 KB, non-accessible)

“Subject to all the imponderables which the pandemic has brought with it, I expect business lending to now emerge from the trough. The drivers for this will be both the disappearance of the negative base effect in the second half of the year and the rebound of business expenditure – even if it is still slightly below the pre-crisis level – around 1.5%. Sooner or later, the financing requirements resulting from business investment will translate into stronger new lending activity. The banks themselves expect a rebound in credit demand in the third quarter compared with the preceding three-month period. But it will take a bit more time for the annual growth rate of new lending to turn positive again. I believe this should be the case in early 2022.”

KfW Credit Market Outlook September 2021 (PDF, 119 KB, non-accessible)

“We need considerably higher IT and digitalisation investment into the future, and that means now. The penetration of information technologies into business and society is not a completely new trend, but the current digitalisation wave is a far-reaching process that is not only sweeping through individual sectors but leading to profound changes in business and society. Digitalisation is the main driver of future economic growth and increasing prosperity. New software developments are also becoming more and more important in areas that have traditionally been our strengths, such as the automotive industry as well as production, environmental and climate technologies. That makes digitalisation a beacon of hope for enhancing the competitiveness of broad sections of the economy and for a return to higher productivity rates. Germany must do more here to catch up with other countries again.”

Digitalisation in international comparison: Germany lags far behing in IT investment (PDF, 197 KB, non-accessible)

“Supply bottlenecks have placed enormous obstacles in the way of small and medium-sized enterprises as they emerge from the coronavirus crisis. Manufacturers and construction firms are suffering the most, but so are wholesalers, retailers and service providers. This is sapping the momentum from the economic recovery that has only just started. Economic growth is likely to flatten in the coming months but will remain positive. The supply bottlenecks will take time to dissipate, but I expect the material shortages to ease at least a little in the course of the coming months. Catch-up effects can then provide impetus for a new growth spurt next year."

Supply bottlenecks are significantly impacting all areas of the SME sector (PDF, 165 KB, non-accessible)

“Germany will have to invest around EUR 5 trillion to achieve climate neutrality by the middle of the century. That is a massive amount, but it is doable. In order for us to meet this challenge, public investment funds must be used in a targeted manner, and private investment must be mobilised. This offers the opportunity to make Germany more competitive and prosperous and enable it to emerge stronger from the transition. The high investment requirements and the management of the associated risks place equally high demands on the financial markets and the real economy, because we need smart and diverse financing tools to fund the transition. But I am convinced that if we join forces we will be able to successfully position Germany for a climate-neutral age.”

Investing EUR 5 trillion to reach climate neutrality – a surmountable challenge (PDF, 270 KB, non-accessible)

“Much indicates that globalisation will continue to move forward at a slow pace after the coronavirus crisis has been overcome. Businesses are well advised to consider such a possible trend and think about alternative growth strategies.

It is important to ensure reliable frameworks for external trade and to return to a more rules-based trade system. Entering into new trade agreements with booming emerging and developing economies, further liberalising trade in services and creating a digital EU internal market can contribute significantly to strengthening international trade.”

Globalisation in crisis

“The last yards are the most difficult. The KfW-ifo SME Barometer shows that the same goes for the pathway of Germany’s small and medium-sized enterprises out of the coronavirus crisis. Shortages of materials, inputs and freight capacity, in particular, have already slowed production for the past months and could also increasingly weigh on trade. Given the multitude of disruptive forces, however, it is difficult to predict when the supply situation will improve. Service businesses are mainly keeping a close eye on infection rates, which were falling during the survey period. Even if infection rates will presumably rise in the autumn, the use of vaccination certificates, tests and face coverings makes broader shutdowns unlikely. All in all, aggregate economic growth is likely to flatten in the coming months but remain positive. In addition, pent-up demand in the manufacturing sector also provides potential for a growth surge when the current supply chain bottlenecks gradually ease. But that will probably not be the case until sometime next year."

KfW-ifo SME Barometer September 2021 (PDF, 96 KB, non-accessible)

“Consumer prices in Germany continued to pick up speed at the end of the third quarter. Measured by the consumer price index (CPI), inflation was 4.1% year-on-year (HICP: 4.1%). The current increase is still strongly determined by the recovery in the price of crude oil and the special VAT effect. These effects will disappear in the new year. However, energy prices are currently also rising for other reasons: For example, there are shortages of coal and natural gas and supply problems on the part of Russia and Norway. In addition, the cold past winter has emptied stocks, and wind energy is suffering a weather-related lull. As a result, energy prices are likely to remain high until the end of the year, with gas and electricity components pushing them up sharply. This should keep headline inflation well above 3% for the rest of the year, before slowly falling back below 2% in mid-2022. Supply bottlenecks in industry remain an additional factor. If these last longer than expected, this is likely to impact economic growth and be felt in consumers' wallets. A good leading indicator for future consumer price developments are wholesale prices, which have recently risen significantly and will be passed on to consumers sooner or later.”

“The coronavirus crisis made an imprint on start-ups in 2020, to be sure, but after this exceptional year we expect the start-up scene to develop just as fast as it did in previous years.”

“Female entrepreneurial activity continues to be influenced by gender stereotypes. These ultimately lead to a smaller share of female start-up entrepreneurs. It would be good for the German start-up ecosystem and VC industry to become more female. After all, Germany cannot afford to squander away innovation potential. Role models that keep women from starting a business are an obstacle. It is important that highly qualified start-up teams emerge irrespective of gender and origin and find the best possible conditions for financing, growth and success. In order for this to happen, gender stereotypes must be overcome and role models strengthened as multipliers.”

KfW Start-up Report 2021 (PDF, 612 KB, non-accessible)

“At the turn of the year, broad money M3 in the euro area had been growing at double-digit rates. The phase of very strong money supply expansion may be over. Nevertheless, money supply growth in August was significantly above the pre-crisis level of around 5%. Housing loans and more government bonds on bank balance sheets are driving this development. Growth in corporate loans, on the other hand, is now making only a minor contribution. This is unlikely to change much in the short term. As the economy recovers, the financial situation of companies is improving; moreover, they built up exceptionally high bank deposits during the Corona crisis. Companies can now use this liquidity stock as uncertainty recedes - in the best case for investment.”

“The last metres are the hardest. This also applies to the German economy's return to pre-crisis levels, as the decline in the ifo index underscores. In particular, bottlenecks in materials, intermediate products and freight capacities have been slowing down production for months and are increasingly impacting retailers as well. Due to the variety of disruptive factors, it is unfortunately currently very difficult to estimate when there will be an improvement on the supply side. Particularly as the strict "zero-covid" policy in China is constantly threatening new disruptions in the supply chains. For the service sectors particularly affected by the pandemic, however, the recent decline in infection figures in Germany is a good sign. The number of infections is likely to rise again in the fall or winter. But with vaccinations, tests and masks, blanket shutdowns at least remain unlikely.”

„The inflation rate in the USA fell in August from 5.4 to 5.3%. The peak of price increases is most likely behind us but the inflation rate will probably remain above the Federal Reserve's two percent target well into next year. At the same time, the labour market data for August were much weaker than expected and the full extent of the economic impact of the fourth coronavirus wave is still difficult to assess. The Fed faces the difficult task of balancing these factors. At the annual meeting of central bankers in Jackson Hole in late August, Jerome Powell announced that the Fed will probably begin to reduce its bond purchases this year. Observers are keen to see whether the Fed will announce a precise tapering schedule at its September meeting next week. However, I assume that the US monetary watchdogs want to observe the economic development a little longer and therefore expect a final decision at the next central bank meeting in November.”

“The coronavirus crisis and the resulting drop in training activity are contributing to the fact that SMEs’ efforts to improve their workforce’s digital skills have stalled. That is bad news because we are in the midst of a structural digital transformation. Investments of the future require digital expertise. It is therefore crucial for businesses, the workforce and the overall economy to rapidly expand training activities. Enterprises that have been hit by the coronavirus crisis in particular need advisory services and financial support for in-company training. Increasingly diverse career biographies make it equally important to promote individual continuing professional development. The guiding principle is self-directed lifelong learning – but not in isolation. A further education campaign could improve productivity and competitiveness already in the short term. In the long term, digital skills must be given greater importance in schools and daycare centres.”

German SMEs lack digital skills, need more training (PDF, 219 KB, non-accessible)

“The all-important question for monetary policy at present is whether the current inflationary pressure is temporary or is likely to persist in the longer term. Against this backdrop, the future of the PEPP program will be the subject of intense debate at the upcoming meeting of the ECB Governing Council. Although the Council members are likely to agree in principle that temporary factors are currently predominant with regard to inflation and in the new staff projections inflation will certainly be below 2% again in the coming years. The hawks among the Council members will emphasise the upside risks to price developments. Moreover, with the rather strong recovery of the euro economy in the second and probably also the third quarter, the justification for the crisis instrument PEPP becomes more difficult. Yet uncertainty about the further development of the economy is high. That is why I expect concrete decisions on the future design of the securities purchase programmes only in December. In addition, the ECB will probably leave itself a lot of flexibility for the purchase volume in the coming months.”

“Companies in Germany are hiring again. This is clearly reflected in the increased number of job applications. 779,000 vacancies were reported by companies to the employment agencies in August, 195,000 more than a year earlier. It is true that production has declined in recent months due to supply bottlenecks in the manufacturing and construction sectors. But the special factors that led to the supply bottlenecks will gradually dissipate in the coming months, as industry insiders also expect. In addition, the order situation in industry and construction remains very good. Both of these factors suggest that the shortage of materials will have little impact on the upswing in the labour market. According to current information, a higher risk is posed by the rapid resurgence of infection figures, which raises fears of a major fourth wave of infections in the autumn. In order to avoid another economic setback, the top priority must therefore be to resolutely continue to contain the pandemic, above all by further increasing the vaccination rate. It is important to convince as many unvaccinated people as possible how sensible and important vaccination against the Corona virus is. Vaccination is not only a question of protecting oneself from the virus. It is also a question of social responsibility. Because many lives, jobs, entrepreneurial livelihoods and the economic future are at stake, not only in Germany, but worldwide.”

“Consumer prices in Germany continued to rise in August. Measured by the consumer price index (CPI), inflation was 3.9% higher than a year earlier (HICP: 3.4%). Energy prices remain the main driver, but food and services, which have benefited strongly from the openings of recent months, are also responsible for the renewed increase. In the case of groceries, the VAT base effect is also likely to be a factor, as the retail sector mostly passed on the reduced rates to consumers last year. One indication that the current increase is likely to remain temporary is the core inflation. Prices of goods less susceptible to fluctuations have risen much more slowly in recent months than energy and food prices, for example. Therefore, the ECB's rather cautious forecast, from today's perspective, of an inflation rate below the 2% target again from 2022 and thereafter seems quite plausible. However, if the supply bottlenecks in industry persist for longer than expected, this is likely to have an impact on consumers' wallets, as companies are likely to pass on the higher costs at least partially to consumers. The recent sharp rise in producer prices could be a first indication in this direction."

"The US is suffering a fourth wave of the COVID-19 pandemic. The seven-day average of new infections is about to exceed the 150,000 mark, a value last reached in January. The fact that the rising number of cases is also once again increasingly influencing everyday life can be seen at the annual central bank meeting in Jackson Hole, which was switched to a viral format at short notice. However, this does not diminish the excitement with which people are waiting for US Federal Reserve Chairman Jerome Powell's speech. The US inflation rate will remain above the Fed's target of 2% in the coming months and the recovery on the labour market has recently picked up speed. So everything is actually in place for a gradual turnaround in monetary policy. However, the Fed is certainly concerned about the rising Corona case numbers and the associated economic uncertainties. A different weighting of these factors explains the divided opinion in the Fed Committee in the run-up to the symposium. So it's worth watching closely to see whether Powell will give the first hints of a reduction in Fed bond purchases during his speech on Friday."

"European corporate credit growth all but stabilized at a low level in July. The chances are good that, unlike in the financial and euro crisis, investment-damaging deleveraging will be avoided this time. In addition to the economic recovery, the highly expansionary monetary policy is also contributing here. This gives companies the financial scope to invest more in fixed assets and innovations again. Nevertheless, the increased indebtedness of European companies will remain a risk to growth and the economy for some time to come, which may materialize when government support comes to an end."

“It's summer, but clouds keep interrupting the sunshine – and that's exactly what's happening to the German economy at the moment. Households have an unusually large amount of money in their pockets following the lockdowns and are now once again demanding long-desired services, for example in the hospitality sector. This has been made possible above all by the significant progress made with vaccinations. At the same time, however, supply bottlenecks in industry and construction are proving more stubborn than initially expected and are dampening production despite good demand. In economic terms, the clouds are once again prevailing, with the business climate falling for a second time in August following the setback in July. This expectation-driven decline is fitting, as there is only limited scope for further upward movement. Supply bottlenecks will only ease gradually, and with the fourth wave due to the contagious delta variant looming, pandemic-related worries are once again on the rise. We have therefore revised our GDP forecast for 2021 slightly downward to 3.0%.”

“Growth is back, but the upward trend is not endless. Powerful growth impulses are coming from the service sector, which got off to a lively start to the summer quarter. On the other hand, manufacturing industry is not expected to make a significant contribution to growth before the end of the year. Until then, the shortage of supplies of materials and inputs will dampen industrial production in particular, but also the construction sector.”

“Two mega deals each worth around USD 1 billion have pushed the German VC market to a new level in the second quarter; sentiment exceeds anything we have seen so far. Alone the increased entry evaluations are a fly in the ointment for many investors, but they have had no significant influence on business sentiment to date. The development in deal volumes indicates that the assessments have risen primarily in follow-on financing rounds and less in the context of seed financing. This can also be viewed as a success in the sense that more confidence is now placed in German start-ups that have ‘established’ themselves.”

Business climate indexes for the German venture capital market Q2 2021

“The coronavirus crisis could go down in history as a catalyst for change in the medium-sized enterprise sector. For some SMEs, the changes in consumer behaviour due to the pandemic will lead to a long-term fall in demand. For the companies affected, adjustments are likely to be unavoidable. The task is to support this sometimes difficult transformation process with appropriate promotional measures and training for employees. If this succeeds, SMEs as a whole could well emerge stronger from the crisis. Even more so since many of them will also benefit from the changes in consumer behaviour and in future enjoy higher levels of demand for their products and services.”

No way back: Many SMEs expect the coronavirus crisis to have a lasting impact on product demand (PDF, 158 KB, non-accessible)

“Successful digital transformation in the business community is of enormous importance for Germany’s future competitiveness. Germany aims to become climate-neutral by 2045, so the drive to digitalisation must take climate change concerns into consideration from the start. This requires policy guidelines for harnessing the opportunities of digitalisation – for example, incentives for the automated flexibilisation of electricity demand in line with supply fluctuations of wind and solar power. In addition, market incentives for reducing greenhouse gas emissions driven by digital technologies are also still too weak.”

The trade-offs between digitalisation and climate action: Why digitalisation must be sustainable (PDF, 203 KB, non-accessible)

“The business situation among SMEs is good, but in terms of business expectations optimism is declining. The newly increasing incidence rates in particular are causing concern among service providers, as it is still not clear how policymakers are going to react. If we keep up our efforts in the areas of vaccinations, tests and face coverings, it should be possible to avoid across-the-board closures among businesses, hotels and restaurants. The rate at which businesses continue to open up is likely to slow. Materials bottlenecks have been plaguing the manufacturing sector since the beginning of the year, and industrial production has tended to fall. Overflowing order books are evidently more important for the situation assessment. Nevertheless, the businesses that have already opened in the services sector combined with consumer catch-up purchases are probably sufficient to ensure solid growth in the current quarter. How things pan out in autumn depends especially on the progress made on the vaccination front in the coming months. Turning to the economy and society as a whole, I can only say: ‘Vaccinate, vaccinate, vaccinate!’”

KfW-ifo SME Barometer July 2021 (PDF, 94 KB, non-accessible)

„Growth is back. After the difficult winter half-year, the euro zone is again on the road to recovery. The rapid openings in May and June have benefited the beleaguered service sectors in particular. With this tailwind and excellent sentiment figures, the European economy is starting the summer quarter. The conditions for further decent increases in GDP are thus good, even if the recovery may lose some momentum due to supply problems and the highly contagious Delta virus. For countries heavily dependent on tourism in particular, the rapid development of new infections in the middle of the peak season comes at an inopportune time. However, unlike last year, a high vaccination rate can limit the health and economic consequences of new waves of infection. Efforts to increase vaccination rates are thus rightly moving to the center of pandemic response."

„While manufacturing disappointed, the music was playing in the service sectors last quarter, with a sharp recovery after the lifting of prolonged pandemic restrictions. After new Covid restrictions took effect in April, infection figures fell rapidly from May onwards, making many openings possible, which were gratefully embraced by consumers. In manufacturing, on the other hand, there is a shortage of materials, which is why bulging order books cannot be worked off. In the current summer quarter, the persistent supply bottlenecks remain a brake on growth. However, the renewed sharp rise in the number of infections in Germany has also dampened the outlook for the critical service sectors somewhat. The pace of further openings is likely to be curbed, but with the systematic deployment of vaccinations, tests and masks, blanket closures of stores, hotels or restaurants should now be avoidable. The momentum of recent months alone is likely to result in solid growth in the current quarter. How things progress in the winter will then be decided in particular by the progress of vaccination over the next few months.”

“Consumer prices in Germany rose again in July, measured by the consumer price index (CPI) by 3.8% year-on-year (HICP: 3.1%). Prices in Germany thus rose as strongly in July as they last did in the summer of 2008. However, the following classification is crucial here: It is true that prices in the areas benefiting particularly strongly from the openings rose significantly, as consumers can now finally catch up on what they had to do without during the lockdown phases. In addition, producer prices rose by 8.5% in June, the highest rate since the second oil crisis in 1982, which will sooner or later be felt in consumers' wallets. However, the higher producer prices are also mainly due to base effects of the economic recovery, such as higher energy and raw material prices. In addition, the special effect of the return to the original VAT rates compared with the previous year will take effect from this month. This effect is likely to be the main driver of inflation until the end of the year. As early as 2022, however, inflation is likely to be slightly below the ECB's new symmetrical inflation target of 2% again, as the above-mentioned base and special effects will then no longer be measured.”

“The economy and the labour market have put on their seven-league boots and are rushing ahead with great strides. This is the long-awaited breakthrough - at least for the time being. Euphoria would be exaggerated, because although the uncertainty surrounding the further course of the pandemic is receding, its effects are still serious. In May, 2.2 million employees were still working short-time. If the number of infections and hospital admissions were to skyrocket again, it might be necessary to restrict the freedoms that have been gained. Meanwhile, another difficulty is looming on the labour market: if fewer workers migrate to Germany due to travel restrictions and fear of infection, the shortage of skilled workers will restrict companies even more than before the crisis. If the upswing continues as clearly as it has, the lack of skilled workers will then hinder more than a third of all companies in their business activities next year. This will dampen the urgently needed growth. In the following years, demographics will further exacerbate the problem. In view of this perspective, we consider it necessary to accelerate the weak growth of labour productivity in Germany. If this is to succeed effectively, a comprehensive economic policy strategy is needed to address the deficit in investment and innovation and also to advance digitalisation through education and qualification. Action is urgently needed here.”

“For growth and employment, innovation and digitalisation are two sides of the same coin. Digital technologies often form the basis for innovation. On the other hand, it is particularly the innovative enterprises that drive digitalisation forward. The fact that ever fewer SMEs are innovating is therefore cause for concern, since progress in the digitalisation of SMEs will also slow down without a broad basis of small and medium-sized innovators."

Innovation and digitalisation in enterprises mutually reinforce each other (PDF, 216 KB, non-accessible)

“The easing of the Corona measures is reviving the US economy and causing prices to rise further. Inflation climbed to 5.4% year-on-year in June and core inflation also increased further to 4.5 %. Short-term inflation expectations have also continued to rise significantly, increasing the gap with long-term inflation expectations. Against this background, the differing assessments of the members of the Federal Open Market Committee (FOMC) as to how quickly the tightening of the monetary policy stance is required can be explained. As a result, this week's Fed meeting is unlikely to bring about any significant changes in the Fed's monetary policy stance. Only on the basis of a new set of data do I expect announcements on changes in the securities purchase programmes at the annual central bank conference in Jackson Hole at the end of August.”

"Growth in corporate lending remains meagre in June. However, the development is better than it appears at first glance. Indeed, the weak growth now is to a large extent due to the rapid increase in loan books over the past year. In addition, there are initial signals that lending to companies could soon pick up again. European banks are already observing a rise in demand for bank financing. Particularly positive: for the first time since summer 2019, institutions are reporting higher needs for investment loans. This is of great importance, as a boost in private investment is necessary for a stable recovery path of the European economy after the expiration of economic policy support."

“Even though the business climate slipped in July, the ifo business survey still indicates a good business situation in the economy. Thanks to low Covid-incidences and renewed appetite for consumption, sectors particularly affected by the pandemic, such as the hospitality sector, are enjoying the longed-for recovery. Manufacturing and construction are struggling due to material bottlenecks, but more important are the bursting order books. Unfortunately, however, Germany is not yet out of the woods in the pandemic. The delta variant is spreading rapidly and, at this pace, will generate high infection figures again in just a few weeks. It is still unclear how politicians will deal with this. With the consistent use of vaccinations, tests and masks, blanket closures of stores, hotels or restaurants should be avoidable. However, the pace of further openings is likely to be slowed, and the infection waves in other countries could further exacerbate supply shortages.”

“The meeting of ECB Governing Council will be seen in light of the new central bank strategy. Contentwise, I expect the ECB to largely continue its monetary policy stance. Three aspects deserve special attention also beyond this meeting:
(1) How narrowly does the ECB actually interpret its new, symmetric 2% target and how does it dif-fer from the Fed's average inflation target in practice?
(2) What is the medium- to longer-term im-pact of the new strategy on asset purchase programmes, especially the pandemic emergency programme (PEPP)?
(3) How do market participants interpret the new wording of monetary policy decisions in the Introductory Statement and Forward Guidance that Madame Lagarde had already announced when presenting the new strategy?

In my view, the symmetric inflation target is by no means a 180° turnaround that makes way to an ultra-loose monetary policy indefinitely. Rather, in retrospect, the ECB has put its actions before and during the pandemic into a strategic framework. In the longer term, however, the symmetric character of the new target also implies the obligation to scale back the expansionary degree of monetary policy again, when indicated."

"The labour market has weathered the lockdown better than generally expected. Despite the significant drop in GDP in the first quarter, the number of unemployed persons has fallen since the end of the year and the number of people in employment has remained stable. For 2021 as a whole, I expect the number of people in work to rise slightly year-on-year to 44.8 million. The unemployment rate will fall from 5.9 to 5.7%. This looks like a very modest recovery but it means that by the end of the year the labour market will be almost as good as it was before the crisis. The biggest risk to the forecast is a renewed spike in infection rates. Vigilance is therefore still called for in the easing of restrictions. A major challenge for the German economy is the shortage of skilled workers, which has increased again considerably since last summer. According to the KfW-ifo Skilled Workers Barometer, in the second quarter of 2021 one in four companies again complained about impairments due to a lack of skilled workers, especially in the construction industry and among IT service providers. A second major challenge lies in reducing the rise in long-term unemployment. Education and qualification can make a significant contribution to curbing the undesirable developments. To this end, it is necessary to expand digital education and strengthen the motivation for lifelong learning and further education, the earlier in life the better. In order to improve equal opportunities, people from educationally disadvantaged backgrounds should receive special support."

“After the coronavirus-induced slump in start-up activity in Germany, 2021 promises to become a good year for start-ups. The cyclical upswing will provide a tailwind and the labour market is also likely to have a positive impact on start-up activity. Besides, many prospective entrepreneurs actually wanted to start their business already in 2020 and only deferred their projects because of the coronavirus crisis. They are far advanced in their planning process and close to implementation. That is also likely to benefit this year’s start-up activity.”

KfW Entrepreneurship Monitor 2021 (PDF, 669 KB, non-accessible)

"In June, consumer prices in Germany, as measured by the consumer price index (CPI), increased by 2.3% year-on-year (HICP: 2.1%). This significant year-on-year increase is so far mainly attributable to base effects of the economic recovery, such as higher energy and raw material prices. However, a look at core inflation also shows a slight increase in underlying price pressures. This is likely to continue in the short term. I expect price pressure to come mainly from sectors that are benefiting directly from the opening of the economy or where production cannot keep pace with the current pick-up in demand due to supply chains that were interrupted last year. In addition, the special effect of the temporary reduction in VAT rates from H2 2020 is likely to put additional upward pressure on inflation in Germany in the coming months. Even if inflation rates subsequently pick up in the course of 2021, I expect inflation to be back within the ECB's target of "below but close to 2%" as early as 2022. In addition to the expiry of the base and special effects, we see signs that the current supply bottlenecks are being overcome."

“I expect the variation in new lending to bottom out in summer before it starts to recover in autumn as the negative base effect vanishes and the economic rebound gains momentum. But there are downside risks. After the coronavirus crisis, businesses will have to shoulder more debt than before and, particularly with a view to the transformation towards a climate-neutral economy, there is uncertainty about the overall framework. That could weigh on demand for investment finance for some time to come.”

"Difficulty in accessing finance is likely to continue gaining importance as a barrier to innovation especially after the acute crisis phase has been overcome. Given the tense liquidity situation and higher debt levels of companies, the trade-off between the desire for stronger resilience and the need for more investment in future competitiveness is becoming more difficult to manage. Innovation policy will therefore have to provide more financial incentives in order for businesses to innovate more than before the crisis. Besides, the skills shortage is currently slowing down innovation activity throughout the SME sector. Promotional measures aimed at building these companies’ innovation capacity must therefore be expanded. Innovations are crucial to addressing social challenges such as climate change, healthcare and demographic change. At the same time, they are the key to securing Germany’s good position in international competition – and thus to growth and prosperity. We can’t afford to respond slowly.”

"The ifo Index indicates a very dynamic economic performance in June. Just by looking at the street scene, it is clear that sales have increased significantly in most pandemic-affected service industries. What many missed during the long Corona winter can now be made up for, and thanks to savings from the Lockdown, some may find their wallets a little looser. Manufacturing and construction have not had sales problems for some time, but have been groaning for months due to pronounced bottlenecks in materials. While new orders in the manufacturing sector have already exceeded the pre-crisis level of February 2020 by 10%, industrial production was still a more than 6% below this level in April and had mostly been declining since the beginning of the year. The automotive industry, which is so important in this country, is particularly struggling with a shortage of semiconductors. But the shortages and the post-Corona boom in manufacturing are two sides of the same coin. Despite all the problems caused by the bottlenecks, it should not be forgotten that a pronounced demand overhang would have been considered an extremely positive scenario just a year ago.”

"The coronavirus crisis has depleted much of the financial reserves of companies in Germany. Along with great economic uncertainty, that has clearly affected the financing environment in recent months. Nevertheless, there are growing signs of a recovery. Enterprises are cautiously optimistic about investing this year in particular. Indeed, with a view to the necessary transition to a digital and climate-neutral economy, an investment surge is urgently needed.”

Business Survey 2021 (PDF, 87 KB, non-accessible)

"The easing of the Corona measures is stimulating the US economy and pushing up prices. Inflation climbed to 5.0 per cent year-on-year in May, the highest level since August 2008. While the Federal Reserve may raise inflation forecasts slightly at its June meeting, the Fed will continue to classify much of the current inflation-boosting effects as temporary. Expiring base effects and diminishing effects of the economic opening ensure that the inflation rate will probably peak soon and fall in the second half of the year. Moreover, the labour market recovery is proving more arduous than hoped and I expect the Fed to maintain its expansionary monetary policy at its meeting. It will be closely watched if there will be any initial indications of a future tapering of bond purchases. If the Fed refrains from such signals at the current meeting, it may do so at the annual central bank conference in Jackson Hole at the end of August."

"It's all systems go for the German economy, with businesses feeling upbeat about the future and ready for the recovery. Mirroring the brightening economic sentiment, companies’ employment plans have switched to growth. That is very promising! But amid all the optimism there is still a need to be cautious. Lifting regulations too quickly might put Germany at risk of gambling away the most recent successes in containing the pandemic. If we open up carefully I am confident that the German economy will experience a strong growth surge in the further course of the year thanks to catch-up effects in the services sector and a progressive easing of shortages in the manufacturing supply chain. Despite the gloomy start to the year, gross domestic product is set to grow by 3.5% in 2021 and then by as much as 4.0% in 2022.”

KfW-ifo SME Barometer May 2021 (PDF, 95 KB, non-accessible)

"The upcoming Council meeting will be conducted by the ECB on the basis of its new staff forecast. The ECB should now be much more optimistic about 2021, as the last forecast in March was influenced by rising incidence figures and the 3rd pandemic wave. I expect the ECB to slightly raise its GDP forecast for this year and the following year. With regard to the inflation forecast, I expect the March forecast to be confirmed, as the main drivers of the recent rise in inflation, such as base and one-off effects, were already known and foreseeable in March. Despite a more optimistic economic outlook, I still consider a continuation of the various monetary policy programmes in their current form likely. Discussions about an early end or a gradual reduction of the PEPP could be interpreted by market participants as a tightening signal and put pressure on interest rates."

"The vaccination offensive is beginning to take effect and the service providers affected by the lockdown are waiting in the wings and digging in their heels. This also applies to the countries to which the majority of German exports go. The economy has already picked up again in important sales countries for German industrial products. This is particularly true of China, which started the new year with a historic leap in growth. In the USA, too, the economy picked up again at the beginning of the year. The strengthening global economy is already benefitting industry. German exports in the first quarter were higher than in the last quarter before the crisis. And the large-scale growth packages of the European Union and the USA will give the economy a further boost as soon as the funds start flowing. If hotels, restaurants, stationary retailers and cultural and sports venues open their doors again across Germany, consumption will also pick up. Last year, the savings rate of German private households rose to a record 16%. In the Corona year 2020, people forwent almost all social consumption options, either completely or to a large extent. If a good portion of this is made up, it could become a turbo igniter for the economy. These are encouraging prospects, also for the labour market. Barring an unexpected setback, employment will rise sharply again by summer at the latest, unemployment will fall noticeably and the number of people on short-time contracts will drop sharply. For this to happen and for the economy as a whole to make a sustained recovery, one thing above all is needed: vaccinate, vaccinate, vaccinate.”

“Without a response, the skills shortage can grow from a serious challenge into an outright growth obstacle. After all, Germany is facing enormous challenges amid the demographically driven decline in labour force potential. A lot of hard work lies ahead, starting with the recovery from the coronavirus crisis, implementing the digital structural transformation and speeding up the transition to a climate-neutral economy through reducing the high government debt and managing the considerable growth of financial burdens for social protection systems to investing in better crisis resilience. If businesses face a considerable shortage of properly skilled workers, it will become hard to do all this successfully. Securing the skilled labour potential must therefore be given the highest priority. This can be done using three mechanisms: 1. Appropriate training and lifelong continuing education. 2. Promoting skilled migration, for example by simplifying the recognition of skills, and by offering German language courses and training for foreigners where local applicants cannot be recruited. And 3. Higher labour market participation in line with the Council of Economic Experts’ recommendation to modify the standard retirement age."

KfW-ifo Skilled Labour Barometer June 2021 (PDF, 168 KB, non-accessible)

"Last month, corporate credit growth slowed sharply again. In particular, last year's historically high demand for bank loans continues to distort the view of lending to European companies in April 2021. As demand for credit peaked during the pandemic in Q2 in Germany, but not until the summer months in other major euro area countries, this is likely to continue to weigh on corporate credit growth in coming months. A further decline would have to be seen in this context. However, in addition to special effects, tighter lending conditions and the disbursement of government financial assistance are also playing a role. The latter have protected companies from further sales losses and reduced the need for additional external financing. In addition, the slowdown in corporate lending may also reflect companies' reduced willingness to invest in fixed capital while uncertainty about the timing and pace of the economic recovery persists. Planning certainty is of great importance for companies in this context, even beyond the pandemic. This is where policymakers can set important framework conditions.”

"In May, consumer prices, as measured by the consumer price index (CPI), rose by 2.5% (HICP: 2.4%) year on year and by 0.5% (HICP: 0.3%) relative to the previous month, respectively. This mainly reflects the recovery in the prices of oil and other raw materials, but also the ongoing economic recovery. Price fluctuations, which are a countermovement to the particularly volatile times of the past year, will continue to have a major impact on inflation in the 2nd half of the year: I expect additional price pressure from the summer months onwards, which is likely to push inflation in Germany above 3 percent throughout the second half of the year. However, this increase is mainly due to the VAT rates, which have now returned to their original level compared with the previous year. The reduced rates had temporarily lowered the price level in the second half of last year. The ongoing vaccination campaign is also enabling the consumption of some goods and services that people had to do without due to the pandemic. This could be accompanied by catch-up effects, a short-term shortage and thus higher prices. However, I consider permanently higher price growth unlikely, and expect prices to rise at a much weaker rate as early as the beginning of 2022."

“The third Corona wave is apparently broken and the sentiment in the companies is rising in line with the vaccination progress. This gives hope, but also urges patience. By easing too quickly in the short term, we would still risk losing the recent successes in containing the pandemic. If, on the other hand, we open the door cautiously now, I am confident that we will see a very strong growth spurt in the second half of the year thanks to catch-up effects in services, which have been restricted so far, and an increasing easing of input bottlenecks in manufacturing. We have therefore revised our economic forecast for 2021 upwards to 3.5% today, despite the poor start to the year.”

“The upturn in VC market sentiment which we saw at the end of the year 2020 continued in the first quarter of 2021. VC investors’ very good assessments of deal flow is particularly pleasing. After all, promising deal flow lays the foundation for promising VC investments. The indicators for deal flow quality and quantity are marginally below their all-time highs. This might reflect the fact that the coronavirus crisis accelerated demand for many start-ups because it has brought to light the needs for their innovative solutions. This opens up investment opportunities.”

“SME business sentiment improved for the third consecutive month in April, and the traditional rule of thumb is that this signals the beginning of an upswing. Businesses are looking to the future filled with hope, and more and more of them are anticipating a successful containment of the pandemic and a recovery later in the year. The chances of this hope turning into reality are good – provided new infections are consistently contained and vaccinations continue to pick up pace. Then Germany can experience a strong growth spurt in the second half of the year on the back of catch-up effects in currently banned services and in the retail sector. Manufacturers’ order books are already filled to the brim.”

“Municipal finances face the prospect of a long Covid. Cutting necessary municipal infrastructure investments has significant long-term consequences, since we need effective municipalities that perform their tasks efficiently to meet major challenges such as climate change and digitalisation in the public sector.”

“We will most likely see another significant rise in municipal debt, to be sure. But most municipalities have sufficient scope for this thanks to the positive development in the previous years. What is now important is that municipalities permanently retain their ability to operate during and after the crisis and efficiently perform their tasks.”

“It is understandable that during the crisis, our measures to stabilise municipal budgets will focus on the immediate future for the time being. But this crisis will hopefully soon be over, and strengthening municipal finances from the ground up will then be back on the political agenda. That is a good thing because the importance of having strong municipalities cannot be rated highly enough for Germany.”

KfW Municipal Panel 2021 – Summary (PDF, 103 KB, non-accessible)

“The pandemic and the long lockdown left their mark on German GDP at the start of 2021. Unlike last fall, the manufacturing sector only partially cushioned the decline in economic output, as companies were barely able to work off their full order books in view of supply bottlenecks for intermediate products. As the sentiment indicators from manufacturers are nevertheless climbing ever higher, the shortfall is probably only temporary. In the current quarter, the boost from the manufacturing sector is likely to ensure positive quarterly growth again. However, this is no consolation for the closed service companies. They can only cling to the accelerated vaccination progress, which promises sustainable opening steps and a significant growth spurt from the summer onwards."

„The monetary union begins the new year as the old one ended: with a drop in economic activity. The different timing of the alternating containment and easing measures has led to a more moderate decline in gross domestic product for the Eurozone than in Germany at the beginning of 2021. Nevertheless, the path back to the pre-crisis level has again become a little longer. In view of the vaccination campaigns that are now gaining momentum, there is improvement in sight for the summer. This is already very evident in economic sentiment. However, it is still unclear whether there will be a noticeable growth spurt in the current quarter. Many Eurozone countries have announced substantial steps to open up their economies. However, the risk of a continuation of yo-yo lockdowns is still high due to the widespread high incidence and burdened intensive capacities.”

“Due to the increased number of infections, the hospitality industry and retail sector have remained largely closed to customers despite the start of spring. Although the restrictions burden many businesses, the labour market remains an anchor of stability. Many companies have been hiring again since last summer. As a result, the number of employees subject to social insurance contributions has risen by a good 300,000 since June. In some sectors it is even higher than before the crisis. These include healthcare and social services, education and training, information and communications and construction. In the coming months, it will be important to set the course for a successful upturn. On the labour market, the aim is to increase the supply of skilled workers and reduce long-term unemployment. This requires increased efforts to improve skills. More than 3 million employees and 1.4 million unemployed have no vocational qualifications. Qualification is also the most promising way to enable employees in the lower income groups to earn more and to open up further prospects for those on short-time working. Welfare state interventions alone will hardly be able to reverse the drifting apart of wages and salaries diagnosed in the Poverty and Wealth Report of the government. This is because wage differentiation reflects not only differences in productivity but also shortages and it is not low-skilled workers who are becoming increasingly scarce but skilled workers who are qualified to meet demand.”

"The strong monetary growth on the ECB's balance sheet continues to be supported by ongoing asset purchases, especially government bonds. As expected however, lending to European companies has lost further momentum. This is likely to be due to two factors: On the one hand, lending in the previous year, i.e. at the beginning of the pandemic, was exceptionally high. This base effect is likely to continue to have a negative impact on credit growth in the coming months and should be interpreted in this context. However, various surveys also show that demand for credit has also declined. This could indicate an easing of the acute liquidity needs of companies. Above all, however, it is likely to be related to the continued reluctance of companies to invest in the wake of the pandemic. Also, likely to be economically relevant is the renewed, albeit only moderate, tightening of lending standards, especially by banks, for corporate loans. This makes it particularly difficult for hard-hit sectors of the economy, including the hospitality industry and stationary retail. Government support measures remain essential here until infection is better controlled."

“The latest rise in sentiment in the German economy is good news. After the business climate had already made a big leap upwards in March in the hope of easing and had distributed many advance praises for the upswing, the persistently difficult pandemic situation spoke more in favour of a decline in the business climate in April. For the upswing to become reality now, new infections must be consistently contained and the pace of vaccination must be further ramped up. Then I am confident that we will see a strong growth spurt in the second half of the year thanks to catch-up effects in the previously banned services and trade. In industry, the order situation is already bright, but so far production is still hampered by supply-side bottlenecks, especially in semiconductors.”

"Thanks to the successful vaccination campaign, relaxed Corona measures and expansive fiscal policy, the US economy has started the second quarter with considerable momentum. An increase in demand is also stimulating prices, and so inflation rose in March from 1.7 to 2.6 % year-on-year. However, this increase is not only a result of the economic recovery but also the low price level in the same period last year due to the beginning of the Corona crisis. But the Fed keeps emphasising that this so-called "base effect" is only temporary and that monetary policy will consequently not react to it. It is therefore to be expected that the Fed will stick to its expansionary monetary policy at the meeting next Wednesday. Fed Chairman Powell also recently pointed out that the Fed wants to see further "substantial" progress in achieving its goals before taking its foot off the pedal. For example, the central bank wants to ensure that disadvantaged groups of the population also participate in the recovery and the Fed seems to be willing to support the US economy for longer than it was the case in past recovery phases."

“The uncertainty created by the pandemic continues to put the brakes on businesses’ investment behaviour and, hence, credit demand. In the sectors hit particularly hard by restrictions such as hospitality, the strained financial situation – sometimes coupled with survival fears – is likely to be preventing many a business from borrowing more. Instead, companies that have been particularly affected are likely to prefer bridging assistance from the government, special write-downs and (equity) grants.”

KfW-ifo Credit Constraint Indicator April 2021 (PDF, 122 KB, non-accessible)

“The coronavirus crisis really put the handbrake on in-company continuing education in 2020 because many companies do not have the money, time and planning certainty they need. Short-term measures aimed at stabilising turnover and liquidity take precedence. This is a challenge for the economy as a whole, especially because we are in the midst of a digital structural transformation. Lack of skills in the workforce is one of the biggest barriers to digitalisation in the SME sector. One third of enterprises were facing a digital skills shortage already before the crisis. Without a significant increase in continuing education activities – ideally throughout the crisis – SMEs will lose competitiveness”, added Köhler-Geib. “Companies are more dependent on support for continuing education than before. Besides promotional loans and cost reimbursement, this could include tax benefits for continuing education expenditure that treats investment in human capital in the same way as investment in assets and permits depreciation.”

Continuing education has dropped in the crisis – need for digital skills is growing (PDF, 196 KB, non-accessible)

“Despite positive sentiment indicators, initial figures point to weak economic development in the euro area in the first quarter of 2021. In addition, the pandemic situation remains difficult and forced several member states to further tighten their health policy measures. At the same time, the inflation rate is on a temporary upward trend characterized by higher energy prices and base effects. This is expected to continue until the end of the year. However, I do not currently see any signs of significant price increases beyond 2021. On the contrary, recently concluded collective bar-gaining rounds, for example in the metal and electrical industries in Germany, are focusing more on job security than on strong wage growth. However, the ECB has already taken account of the changed inflation trends for this year with an upward revision of its forecast in March. At the next ECB meeting, I expect the current monetary policy parameters to be maintained. With the PEPP, the central bank continues to have enough leeway and flexibility to respond to short-term tighten-ing of financing conditions for sovereigns and the corporate sector. A discussion about an end to the purchase programs and initial interest rate hikes remains premature.”

“Unlike in the spring of 2020, there was no increased demand for credit in response to the restrictions mandated during the second coronavirus wave”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “This is probably mostly because its impact on the overall economy has been less severe.” To be sure, the lockdown ‘light’ imposed in autumn and its tightening from mid-December put renewed pressure on many businesses – mostly in those sectors that were directly affected by closures. Nevertheless, the fourth quarter did manage to close with positive economic growth of 0.3% on the previous quarter. “The combination of a relatively stable economic situation, financial support from the state and businesses’ ability to adapt their offerings and costs has enabled them to consolidate their financial position. The need for new loans to keep businesses running in the pandemic has fallen”, said Köhler-Geib.

KfW Credit Market Outlook March 2021 (PDF, 136 KB, non-accessible)

“The March findings of the KfW-ifo SME Barometer show a very encouraging improvement in sentiment on all fronts, but they are merely a snapshot”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The loosening of restrictions announced for retailers and hospitality operators in early March – subject to falling case numbers – and the positive outlook for the global economy was probably the main driver behind the marked improvement in sentiment. But given the surging new wave of infections and the more contagious UK virus mutation, renewed restrictions and extended containment measures are now necessary. That will push back the economic recovery. But the strong improvements in sentiment across the economy as a whole in March illustrate the great potential for a rebound once the pandemic has been successfully suppressed. They are a vote of confidence in the coming economic rebound”, added Köhler-Geib. “By September, the six-month horizon for which business expectations were surveyed, a comprehensive recovery is definitely plausible. But this will be contingent on a systematic acceleration of the vaccination rollout combined with a convincing testing strategy.”

KfW-ifo SME Barometer March 2021 (PDF, 155 KB, non-accessible)

"With infection figures soaring again, hopes of an end to the lockdown by Easter have been dashed. This is bitter for many affected businesses, who are burdened by the lockdown and worries about the future. The uncertain business outlook is hampering much-needed investment and innovation, as well as preventing vacancies and apprenticeships being filled. That's why we urgently need a "whatever it takes" mentality now when it comes to vaccinations, testing and contact tracing. This is the only way we can sustainably escape the lockdown. Until this can be achieved, the federal and state governments can only support the businesses affected by the lockdown with economic assistance. A look at business registrations makes it clear that the measures are having an effect: In January 2021, around 43,900 businesses gave up their trade, compared with 55,900 a year earlier. And in the crisis-hit hospitality industry, only 2,700 innkeepers and hoteliers gave up their businesses in January 2021, compared with 4,500 a year earlier. In 2020 as a whole there were significantly fewer business closures than a year earlier thanks to the economic aid and the suspension of the obligation to file for insolvency. This is a success in the fight against the economic crisis but in perspective it must be reconciled with structural change. After all, companies have to face up to competition and only those that can sustainably cover their costs and generate profits from their own sales will be able to survive and retain their jobs. At present, the service companies hit hard by the lockdown can only cover their costs with the support of economic aid. Short-time allowance continues to stabilise the labour market but it is also clear that this is only a temporary solution."

“In March, consumer prices, as measured by the consumer price index (CPI), rose by 1.7% (HICP: 2.0%) year on year and by 0.5% (HICP: 0.5%) relative to the previous month. Price developments in Germany in 2021 will thus continue to be characterized by base and special effects. For example, the price increase in March is likely to be mainly attributable to hikes in oil prices and other raw materials following the global economic recovery. This base effect is likely to intensify over the course of the year, particularly in the second quarter, but will fade by the end of the year. Whether there will be additional price pressure will depend above all on the further course of the pandemic. With the end of most health restrictions, increased consumption demand for goods and services, which was not possible for some time, could lead to short-term supply bottlenecks and thus higher prices, also in restaurant and accommodation services and in transportation. However, if the third wave makes a new tightening necessary, this poses a downside risk to price developments. Against this backdrop, I welcome the communication from the European Central Bank (ECB): It signals that the ECB will see through the current price development and that no fundamental change in course is to be expected due to temporary price fluctuations.”

“The economy is in a stop-and-go mode, with lockdowns and easings alternating at the rhythm of Corona waves. Business confidence has now risen significantly in March, but this is only a snapshot in time given the renewed – and unfortunately necessary, because of the British viral mutant – tightening of containment measures. With the third wave of infection building up, the expected economic recovery will be pushed back somewhat. This makes a consistent expansion of vaccinations, combined with a convincing testing strategy, all the more important. Only then can economic activity, which is currently taking place mainly in the producing sector, gradually return to trade and services as well and ensure strong growth later in 2021.”

"The growth of monetary aggregates in the euro area is increasingly driven by credit flows to the public sector and is less and less attributable to new lending to the private sector. The European corporate credit market has been losing momentum since the pandemic-induced surge in the spring and summer, although this cannot yet be seen in the year-on-year comparison of loan stocks. On the positive side, this development points to a stabilisation of the liquidity situation in companies. However, this is likely to apply above all to those sectors in which things are looking up despite the continuing burdens of the pandemic. European industry, for example, shone in March with excellent sentiment values. Things remain difficult for hard-hit sectors of the economy, including the hospitality industry and the stationary retail trade. Here, government support remains important until infection is better controlled. Looking to the future and the necessary structural changes, I am also concerned about the subdued demand for investment financing."

"The US inflation rate rose slightly year-on-year in February and now stands at 1.7%. A no-ticeable increase is to be expected in the short term, as the Corona crisis led to significant price declines last year. However, the US Federal Reserve has repeatedly emphasised that it will look through these temporary effects. In the coming months, the recent economic recovery will give inflation a further boost. The successful vaccination campaign, falling infection figures and the 1.9 trillion US-dollar fiscal package will provide an additional tailwind for the economy. Nevertheless, the Fed is expected to maintain its expansionary monetary policy at Wednesday's meeting. The economic recovery is uneven and, according to Federal Reserve Chairman Jerome Powell, far from complete. Moreover, in addition to an inflation target, the Fed is also aiming for maximum employment. A price increase of over 2% could therefore be tolerated for a while, given that there are currently still 9.5 million fewer US Americans in work than before the Corona crisis."

“Digitalisation is a beacon of hope for enhancing the competitiveness of broad sections of the economy and for a return to higher productivity rates. With the crisis now expected to improve in the further course of this year, SMEs will have to keep up the momentum of their digitalisation efforts and move beyond remote working and video conferences as new achievements. Companies now have to address strategic digitalisation projects and secure and continue developing the qualities that have proven to be beneficial during the crisis in the long term, such as flexibility, initiative and entrepreneurial spirit. Many businesses will probably find this to be challenging. The tense liquidity situation and debt levels, which have risen in the course of the crisis, are likely to hamper the implementation of such projects when the crisis is over. Besides, many businesses are sure to have developed a greater desire to become more crisis resilient as a result of the pandemic. In order to address these conflicting goals of enhancing crisis resilience and increasing competitiveness, businesses require investment incentives for digital transformation and improved frameworks. That can enable them to complete the necessary digital transformation, stay in the race against international competitors and harness growth opportunities.”

KfW SME Digitalisation Report 2020 (PDF, 1 MB, non-accessible)

“The ECB Governing Council is likely to use its meeting next Thursday to evaluate the stronger than expected inflation performance of the past two months and the increase in bond yields, especially on U.S. government bonds. I expect the ECB to make a noticeable upward adjustment in its inflation forecast for 2021. For example, its December forecast is still based on a significantly lower oil price. In addition, the continued health policy restrictions could be accompanied by short-term supply bottlenecks and higher prices once they are lifted. However, the current higher inflation rates are unlikely to lead to a fundamental change in the monetary policy stance. Rather, the ECB will emphasize that it sees little evidence of inflationary pressures beyond 2021, by which time temporary and base effects will have subsided. In addition, the longer-than-expected policy restrictions will negatively impact Q1 GDP. In dealing with this and the rise in (real) yields, the ECB could use the flexibility built into the PEPP in the short term and step up the recent rather below-average weekly purchases again.”

“This year, there is unfortunately little good news from Germany’s SME sector for International Women’s Day on 8 March: women are still underrepresented at the helm of small and medium-sized enterprises, and their numbers increased little in 2020 during the pandemic. The reluctance of women to start up businesses, which we have seen for several years, is slowing the rise in the numbers of women-managed businesses. The fact that young female self-employment has been more badly hit by the COVID-19 restrictions, is likely to put a further damper on prospects. It seems unlikely that more women will be found at the executive levels of small and medium-sized enterprises in the foreseeable future.”

“Coping with the Corona pandemic has been and will be associated with further, substantial finan-cial burdens for the EU member states. The temporary application of the escape clauses enshrined in the European fiscal rules therefore provides additional room for maneuver. The EU Commission today proposed to apply the escape clause also to the year 2022. The aim is to ensure that the fiscal stimulus does not have to be withdrawn too early, due to the rules, and that the economic recov-ery after the pandemic is stalled. Against the backdrop that some member states may need until 2023 to reach the pre-crisis level of GDP, this proposal appears to make perfect sense. However, in view of the structurally high debt levels in the euro area and the ECB as the largest single creditor of the member states, medium-term strategies that credibly reduce debt levels to long-term sustain-able levels are crucial. The targeted and efficient use of Recovery Fund resources is just as much a starting point as the fiscal reform process. In this way, fiscal sustainability can be combined with the need for investment in green and digital projects for the future."

“After the crashing slump in December, retail sales have now fallen even further. No wonder, because the retail sector was hit by two adversities at once in January: the lockdown and the withdrawal of the temporary VAT cut, the extension of which would have helped only those companies that hardly suffered any losses anyway. Since a significant part of the retail sector – including mail order, supermarkets and other convenience stores – remained open during the lockdown, the aggregate minus of 4.5% says little about the shortfall in the closed stores. In some cases, the scope for adjustment is limited, which is why the need for targeted support remains high. In terms of the economy as a whole, we will come through the second lockdown much better than through the first, thanks to the stable recovery in manufacturing. For the sectors directly affected by the lock-down, however, this is little consolation.”

“Although the improved SME business sentiment in February makes for a hint of spring, hopes of a swift end to the lockdown seem likely to be dashed in view of the rapid spread of the more infectious variants of the virus and the fact that infection rates are now only stagnating. GDP is expected to shrink tangibly, given the long lockdown at the start of the year, although positive trends in the manufacturing sector, which has been able to largely decouple itself from the pandemic, should prevent a nosedive like the one we saw in spring 2020. The second quarter should see solid growth even if the lockdown is eased only cautiously. But real relief for the sectors that have been hard hit by restrictions cannot be expected before the summer, once the vaccination campaign has made genuine progress. For this, and in the meantime, it is up to the political level to take steps to prevent a third wave, including targeted use of rapid antigen tests and effective contact tracing.”

“The ECB Governing Council is likely to use its meeting next Thursday to evaluate the stronger than expected inflation performance of the past two months and the increase in bond yields, especially on U.S. government bonds. I expect the ECB to make a noticeable upward adjustment in its inflation forecast for 2021. For example, its December forecast is still based on a significantly lower oil price. In addition, the continued health policy restrictions could be accompanied by short-term supply bottlenecks and higher prices once they are lifted. However, the current higher inflation rates are unlikely to lead to a fundamental change in the monetary policy stance. Rather, the ECB will emphasize that it sees little evidence of inflationary pressures beyond 2021, by which time temporary and base effects will have subsided. In addition, the longer-than-expected policy restrictions will negatively impact Q1 GDP. In dealing with this and the rise in (real) yields, the ECB could use the flexibility built into the PEPP in the short term and step up the recent rather below-average weekly purchases again.”

"Bank loans to European companies are still growing at strong rates year-on-year. However, this has been masking a significant cooling of credit dynamics for quite a while now. This can be seen in the monthly credit flows, which came to a net standstill in January. At the same time, bank deposits of non-financial corporations exceed last year's level by more than a fifth. On the surface, these aggregate figures give the impression of an adequate liquidity situation in the European corporate sector. However, this would be a misconception, as there are now large divergences in the extent to which individual sectors and companies have been affected by the pandemic. Financial aid by governments and the maintenance of favourable financing conditions by the ECB therefore remain necessary for the time being to limit the economic damage caused by the virus."

"Bank loans to European companies are still growing at strong rates year-on-year. However, this has been masking a significant cooling of credit dynamics for quite a while now. This can be seen in the monthly credit flows, which came to a net standstill in January. At the same time, bank deposits of non-financial corporations exceed last year's level by more than a fifth. On the surface, these aggregate figures give the impression of an adequate liquidity situation in the European corporate sector. However, this would be a misconception, as there are now large divergences in the extent to which individual sectors and companies have been affected by the pandemic. Financial aid by governments and the maintenance of favourable financing conditions by the ECB therefore remain necessary for the time being to limit the economic damage caused by the virus."

“A subsiding infection situation in February, supports a noticeable rise in business confidence. It has risen because, at the time of the survey, companies expected a cautious easing of the long lockdown in March. The spread of viral mutations is currently calling that into question again. If they can be kept in check, decent growth in the second quarter is certainly in the cards after a noticeably negative opening quarter. However, a real easing of the situation can only be expected with significant progress in vaccination, as we are still a long way from the low incidence rates seen after the first lockdown. Sufficient vaccine doses will probably be available by summer, but timely expansion of vaccination capacity will also be important. In the meantime, policy is also needed to prevent a third wave of infection with measures such as wisely used rapid tests and improved contact tracing.”

“The KfW-ifo SME Barometer shows a bad start to the year and growing pessimism among the majority of small and medium-sized enterprises. Compared with last spring, however, sentiment in the sectors affected by the restrictions is at least no longer dropping quite as low. Adaptation measures such as the introduction of contactless sales channels are likely to pay off. Most of all, however, the manufacturing sector appears to have decoupled from the pandemic activity, so that gross domestic product will contract much less in the current quarter than last spring. But the spread of virus mutations has created great uncertainty about the further course of the pandemic. Nevertheless, an economic recovery can be expected in the spring. The extent of the rebound, however, will depend heavily on progress in vaccine rollout and the success of the current lockdown.”

KfW-ifo SME Barometer January 2021 (PDF, 242 KB, non-accessible)

"The European economy proved more resilient in the autumn quarter than initially expected. In view of high infection figures and renewed, partly strict lockdown measures, the decline in euro area GDP of 0.7% is comparatively moderate. Nevertheless, the balance for 2020 as a whole is devastating also from an economic perspective. The bottom line is that overall economic output fell by 6.8%, which is significantly more than during the financial crisis. However, it is good news that consumers and companies are better able to adjust to the difficult conditions as the pandemic continues. Industry in particular continued its catch-up movement quite unimpressed, partially compensating for the restrictions in other sectors in the second lockdown. Nevertheless, the outlook is subdued. Due to the intensity of the virus spread and the danger posed by mutations, health protection measures will remain in force for some time to come. As a result, GDP in the monetary union is likely to contract again in the current quarter. From spring onwards, I expect the recovery to resume, although its extent will depend on the still uncertain progress of vaccinations. Any resources and efforts leading to a rapid improvement in the pace of vaccinations would more than pay off."

“At +0.1%, German GDP in the final quarter of 2020 is virtually on par with the previous quarter. Destatis had already indicated such an outcome around two weeks ago on the occasion of the presentation of the preliminary results for 2020 as a whole. Measured against the original concerns at the beginning of the second lockdown, this is good news in what continues to be a very difficult time. With the lockdown extended once again until at least mid-February, we must now unfortunately brace ourselves for a significant decline in economic output in the opening quarter of 2021 of between a good -1% and -3% before the economy picks up again from next spring onwards with the then hopefully possible return of public life. The expected decline in economic activity will at least be far milder than the steep drop in the first lockdown, as the inevitable downturn in the restricted service sectors will be at least partially offset by upward industrial production. To reconcile health protection and economic activity, approaches to make the lockdown more efficient are helpful. This includes expanding home office work where possible.”

"The extension and tightening of the lockdown is once again demanding a high level of acceptance and stamina from citizens, employees and companies. This is a tough test for many. However, the current lockdown is expected to have a far less serious impact on the economy as a whole than the lockdown in the spring of last year. There are several reasons for this: Manufacturing and exports are far less affected, many businesses have established alternative sales channels with online sales or delivery and pick-up services and others have upgraded IT technology and allowed more employees to work from home. The possibility of vaccinating a large part of the population during the year opens up the prospect of containing the pandemic by the summer to the point where it has little impact on the economy. If enough people get vaccinated and the vaccines work as hoped, we may see a significant upturn in the second half of the year. Under these conditions, it is likely that the number of people in work in 2021 will again be slightly higher than in the crisis year 2020, at 44.9 million, and the unemployment rate should fall from 5.9% in 2020 to 5.8% in 2021."

“Growth in loans of non-financial corporations on the balance sheets of European banks has leveled off in recent months at 7%. In Germany, however, it is now significantly weaker than the European average. Member states' credit guarantees have played a major role in stabilizing access to bank loans in the euro area, even during the pandemic. Now, however, there are increasing signs that banks are becoming more cautious in their lending and are pricing in higher risks in their lending conditions. Most recently, for example, a clear majority of European financial institutions in the ECB's Bank Lending Survey indicated that they had tightened lending standards. This is likely to be a direct consequence of the containment measures taken to combat the second wave of infection. While uncertainty about the further course of the pandemic is dampening demand for credit and thus the growth prospects for corporate lending, unhindered access to credit for companies with functioning business models nevertheless remains an important prerequisite for economic recovery.”

“In the second coronavirus wave so far there has been little interest in bank loans; companies’ demand has dropped to a record low. The likelly main reason is that businesses are very reluctant to invest because of uncertainty about the further course of the pandemic. That is understandable from a business perspective but has severe consequences for the overall economy in the medium term. It will cause the backlog in major structural issues such as digitalisation and sustainability to grow bigger and bigger. According to preliminary figures released by the German Federal Statistical Office, companies invested 6.6% less in their businesses in 2020 than in the previous year. Demand for debt capital was also reduced by the fact that manufacturing, a significant part of the economy, is hardly affected by restrictions, unlike in spring. Besides, the government’s additional financial support for businesses has limited liquidity shortages – despite all problems. Another aspect which I believe plays a role is that as the crisis grinds on, some businesses may no longer be able or willing to take on additional debt burdens to offset losses in turnover.”

KfW-ifo Credit Constraint Indicator January 2021 (PDF, 142 KB, non-accessible)

“After the U.S. economy grew by an annualized 33.4 percent in the third quarter of 2020 compared with the previous period, GDP increased by just 4.0 in the fourth quarter. The slowdown in the economic recovery comes as little surprise, given that rising infection figures and the associated containment measures weighed on economic activity at the end of the year. Beneath the surface, the picture is twofold. While the recovery in manufacturing sector and the real estate market con-tinued in the final quarter, household consumption was held back by Corona restrictions and the cooling of the labour market. Although the pandemic continues to weigh on economic activity at the beginning of the year, the economic recovery could pick up speed again in the summer months. On the one hand, the number of infections is expected to fall thanks to an increase in vaccination rates and the shift to outdoor activities, and on the other hand, the new government is planning extensive fiscal packages which should provide additional support for the economy.”

"The economic recovery in the US has slowed significantly recently. Rising infection rates and the accom­panying containment measures are weighing on the job market and households. Total non-farm employment fell by 140,000 in December and retail sales recorded a decline for the third month in a row. The Fed will maintain its loose monetary policy until the US economy stabilises. No change is expected in either interest rates or the purchase programme. Falling infection figures combined with fiscal stimulus should boost economic activity in summer and raise the inflation rate in the medium term. However, last year's switch to an average inflation target will allow the Fed to approve price increases of more than 2% for a while, as the inflation rate has already been below the monetary guardians' target for some time. Moreover, excess capacities that still exist will counteract a significant overshooting of the two-percent mark. A key rate hike seems therefore ex-tremely unlikely this year."

“The start into 2021 is tough, the recovery follows in the course of the year – the ifo Business Climate is currently also moving within this range of virtually all current economic forecasts. Unfortunately, it clouded over again in January. Concerns apparently predominate in view of the difficult start to the year for many companies constrained by the Corona measures. For more hope to become reality again, patience and discipline are still needed first in pushing back the new infections, an effective vaccination strategy including further capacity expansion, and effective support for businesses affected by the lockdown, especially in the trade and services sectors. With the return of public life then possible, the chances of a strong recovery from spring onwards are good. Moreover, stable upward industrial production ensures that the macroeconomic damage in the current lockdown is likely to be far less than in the first half of 2020.”

“The coronavirus crisis initially triggered a wave of innovation and digitalisation in many businesses, such as the expansion of home working capacities or changes to sales methods. But this push is superficial. After all, we see that the coronavirus pandemic is impacting on future investment in the SME sector overall. This applies to the immediate period during the acute crisis, and a downturn in future investment must be feared after the crisis as well, because businesses will then invest more in crisis resilience. These financial resources will then be unavailable for investment in greater competitiveness. Economic incentives can help reconcile these conflicting goals.”

Coronavirus crisis is hampering innovation, digitalisation sees mixed trend (PDF, 184 KB, non-accessible)

“The 46th President of the USA Joe Biden takes office at a difficult time. The number of new Corona infections in the USA remains at a worryingly high level and Corona-related deaths have also recently reached new highs. The strong economic recovery which we saw in the autumn has lost its steam significantly due to the new wave of infections and associated containment efforts. Joe Biden has made it his mission to jumpstart the country in both its response to the pandemic and its economic recovery. To do so he has laid out plans for a USD 1.9 trillion Corona aid package, with USD 400 billion for testing and vaccination, and a large package of stimulus support for households, businesses and communities. Against the backdrop of another very high number of new claims for unemployment benefits and the possible expiration of the unemployment benefit subsidy in mid-March, it makes sense to bring this stabilisation package to Congress first. Another fiscal package addressing structural issues such as infrastructure and climate change will follow later. President Biden is depending on votes from Republican senators to implement his plans. However, the ongoing impeachment proceedings against Donald Trump could have a straining effect on the already difficult relationship between the two parties, especially in the early days of the new presidentship. "

“Thursday's meeting of the ECB Governing Council is unlikely to bring any surprises. I expect the ECB to keep its foot on the accelerator. However, an acceleration, i.e. a further increase in its degree of expansion, seems unlikely at present. It is true that the inflation rate in the euro area is still far from the ECB's target (2%). However, recent economic development in Germany and the euro area has been not as bad as expected. The ECB will therefore want to wait and see whether and for how long the pandemic-related restrictions will extend into Q2 and how much this could affect the economy. The monetary policy discussion is currently somewhat different in the USA: On the one hand, concerns about a noticeable rise in inflation in the course of the year have led several prominent central bankers to call for initial tightening ("tapering") at the end of the year. On the other hand, with its new average inflation target, the Fed has sufficient leeway to not have to tighten immediately. However, looking at the data and the ECB's forward guidance communication, a tightening debate for the euro area seems premature."

“The Corona pandemic left deep economic scars on Germany in 2020: the reported GDP slump of 5.0% is the second strongest since the Federal Republic came into existence, just behind the financial crisis of 2009 and far behind all other recession years. Measured against the original fears after the outbreak of the pandemic, however, this sad result is also a success in damage limitation. For in March last year, a leading German research institute considered a crash in economic output of up to 20% possible, and by mid-year the consensus forecast was still -6.5%. The successful damage limitation is due to the effective containment of the first wave of infections, the easing that this made possible from May onwards, and the accompanying, very extensive economic policy stabilisation measures. The recovery in manufacturing that began in the summer has so far ensured that Ger-many has at least come through the second lockdown, which began at the beginning of November, relatively unscathed. This gives me hope, even if the renewed extension and tightening of the restrictions makes a contraction of GDP in the first quarter of 2021 likely. With the prospect of large-scale deployment of effective vaccines soon, as well as the experience of a rapid pace of recovery last summer, a strong rebound later in 2021 is still very likely.

The Corona pandemic brought a turning point in the German government budget: after eight con-secutive years of surpluses, the government ended 2020 with a deficit of EUR 158 billion or 4.8% of GDP. The very strong fiscal stimulus from the March Corona Shield and the June stimulus pro-gramme do justice to the historic crisis. The swift and courageous intervention protected the economic substance in the lockdown, spurred the recovery and thus saved the economy from worse. The crisis is not over yet, however, and the need for government support remains high for the time being. Fortunately, Germany can afford this support. Germany's gross public debt, at an estimated just over 70% of GDP last year, was far lower than at its peak after the financial crisis (2010: 82%) and also than in other major industrialised countries. Of course, long-term debt sustainability re-mains a key issue. Here it is crucial that the interest burden ratio of the German government is historically low despite rising borrowing because of the current low interest rate environment. There is therefore scope, and it is even advisable, to tackle the necessary consolidation only once the crisis has been sustainably overcome and the economy has embarked on a self-sustaining upswing. I am convinced that the best prospects for a sustainable recovery of the German economy exist if it is possible to use the necessary aid effectively for the green and digital transformation of the economy and society.”

“Enterprises that can or must focus on only a few markets are particularly vulnerable. SMEs are therefore well advised to tap into new sales and procurement markets. More than half of small and medium-sized SME exporters in Germany do business in not more than two target regions.But enterprises must also be able to afford to increase their resilience against future shocks. The expected short-term efficiency losses may prevent enterprises from reconfiguring their value chains if they are under high competitive pressure. After enterprises borrowed capital to bridge liquidity bottlenecks during the coronavirus crisis, they may now have difficulty accessing financial resources they need to realign supplier relationships or tap into new sales markets. New digital technologies facilitate integration into global value chains and can help enterprises better manage risks in their supply relationships. That makes the decision to build up resilience easier for SMEs and prepares them better for the next crisis."

“The prospect of effective vaccines being deployed soon and successes in the fight against the pandemic in Asia are immunising the economy and the business climate. Although Europe and many U.S. regions are in more or less strict lockdowns, the industry continues to catch up – a development that is ongoing in the short term despite the tightening that took effect on Wednesday. For high-street retailers, the Christmas shutdown is a tough blow, but economically the effect is likely to be limited because of their rather small share in GDP, as well as the shift to online retailing. For minimising economic damage, the time around the turn of the year is more appropriate than any other, because in many cases economic activity is shut down anyway. The tighter lockdown opens up the possibility that at least some of the now restricted economy can be ramped up again in the first quarter, or at least prevent even more drastic measures. For this to work, broad participation by the society will be needed, as will improved safeguards for school operations, including increased testing activity, and increased contact-tracking capacity.”

“So far, most small and medium-sized enterprises are likely to have stuck to their succession plans despite the coronavirus crisis, as SMEs entered the crisis well-prepared. But the more the crisis drags on, the higher the risk of closure instead of orderly succession. Successful generational transition in the SME sector clearly depends on the severity and progression of the coronavirus crisis. For example, putting plans for medium-term succession off for too long would diminish the chances of success. Successful business transition requires several years of planning. And even well advanced negotiations – with the finish line in plain sight – can fail if the overall environment changes dramatically.

It is therefore essential for enterprises to be released as quickly as possible from having to deal (only) with securing their immediate survival and to be able to return to important issues of the future. The current advances in vaccine development are also very important for business succession because an economic recovery allows companies to shift their focus back on making transfer arrangements. In the meantime, government assistance that secures continued liquidity for small and medium-sized enterprises while signalling political determination on the way out of the crisis is a key building block. The second building block consists in activating and supporting potential takeover entrepreneurs. After all, the combination of unfavourable demographics and diminishing entrepreneurial spirit means that the demand for successors will outstrip the supply for years to come."

“The decisions of the ECB's Governing Council are awaited almost as eagerly as Santa Claus, as ECB President Christine Lagarde announced a review of all monetary policy instruments at the last meeting. In view of the second wave of infection and the renewed contraction of the euro economy, the ECB will do everything possible to keep financing conditions very favorable. Ultimately, it is likely to result in a recalibration of the two crisis instruments PEPP and TLTRO: By keeping interest rates on government bonds low everywhere with the PEP-Program, the ECB wants to ensure that the fiscal support measures are not withdrawn too early. Meanwhile, the targeted longer-term refinancing transactions (TLTROs) give banks a strong incentive to expand their lending. I expect PEPP to be increased by around EUR 500 billion in combination with an extension until the end of 2021. Although the increase is currently similar to refueling with a half-full tank, in the end the funds will not have to be used up completely. I also expect additional auctions of the targeted longer-term refinancing transactions until at least the end of 2021 with further improved conditions. If the ECB should further reduce the deposit rate in addition to the expected changes to PEPP and TLTRO, this might be rather counterproductive. Firstly, this would result in a loss of political capital in the northern euro countries and secondly, this step could rather unsettle the markets in the current situation, as the ECB has not gone so far even in March, when the situation was much more critical.”

“As a result of the second wave of infections in Germany and the partial lockdown that was recently extended until at least 20 December, the German economy will likely contract by around 1% this quarter. The current KfW-ifo SME Barometer shows that small and medium-sized enterprises in particular anticipate setbacks, even though they expect them tol be less dramatic than in the spring”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “In the short term, unfortunately, a relatively sweeping ban on business activities with high risk of infection will be inevitable. Over the medium term, however, the successes in vaccine development mean there is much light at the end of the tunnel.”

“Simple pleas and a reliance on voluntary actions and discretion had to be further built upon in order to curb the corona pandemic. This meant that a new lockdown for restaurants and hotels, cultural events and personal services was unavoidable. The measures are now being extended and tightened. Developments in other countries show what can happen if the pandemic is not contained sufficiently: If Germany had as many corona deaths per inhabitant as Great Britain, France, Italy, Sweden, Spain or the USA, we would already have 40,000 to 55,000 more corona deaths. We must keep these figures in mind when considering the containment measures. When the German Council of Economic Experts (“Sachverständigenrat”) praises the Federal Government for its pandemic management, I can only support it – both from a health and economic policy perspective. As a result of the “lockdown light”, GDP will shrink again but much less than in the spring. The number of unemployed persons could increase by about 100,000 as a result of business closures and the number of short-time workers could temporarily increase by up to half a million. This will particularly affect low-skilled workers, mini-jobbers and those in lower income brackets. Promoting retraining and further training can therefore be the most effective way of helping to bring down unemployment again quickly next year. Overall, skilled workers are in demand in Germany, as it is expected that, among other things, the shortage of skilled workers in the health and care sector and in MINT occupations, alongside a lack of digitisation skills, will hinder growth in the years to come. Vocational education and training must therefore be geared towards reducing deficits in problem areas.”

What we need is a digital and green investment surge. And now is the time for economic policymakers to create the framework, provide incentives for investment and lead the way with start-up finance in order to make future growth possible in the two key areas of digitalisation and climate action. There are many starting points from which to attenuate the target conflict between financial resilience and capital expenditure in which many businesses find themselves. These include reducing the uncertainty for providers of capital, for example through a reliable signal for rising CO2 prices, addressing constraints such as skills shortages and lowering financing costs. We face major challenges but this is precisely the right time to chart the course forward to come out of the crisis stronger. We must think beyond the coronavirus crisis in order to secure lasting growth and prosperity in Germany."

“For the first time since April, growth in corporate loan stocks in European banks' balance sheets has fallen below the seven percent mark. The slowdown had already become apparent in the banks' reporting on new business volumes. Many companies are likely to have built up sufficient liquidity to get through the pandemic. According to the information provided by the financial institutions in the Bank Lending Survey of October, the demand for credit declined due to falling working capital needs and the continuing weakness of investment. In addition, legislative and non-legislative moratorium agreements that were agreed for around 10% of European corporate lending are now gradually coming to an end. Despite the second wave of infections, the peak of borrowing is therefore likely to be behind us. Nevertheless, an intact supply of credit remains just as important as a safety net for heavily affected regions and sectors as it is for companies that want to invest in their future now.”

"The ifo Business Climate shows that German companies are facing a difficult winter. Thanks to the good news from the vaccine development, the long-term outlook has improved. However, the second wave of infection still needs to be broken, probably with extended containment measures. In our "Economic Compass" published today, we expect economic output to decline by about 1% in the current winter quarter, far less than in the spring. This is due to the fact that the restrictions affect a smaller share of the economy and that industry remains on course for recovery. The down-side risks remain high.”

“In October the worry lines among SMEs deepened again because of the rapid spread of new COVID-19 infections and foreseeable business restrictions”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The partial lockdown announced for November in Germany and almost all other European countries will interrupt the economic recovery for the time being. But the fairly prompt response, at least in Germany, means there is a good chance that the damage can be confined to the particularly contact-intensive sectors. The planned compensation payments are not just important for those businesses that have already been hit hard and now have to close again, but are designed to prevent worse outcomes for the aggregate economy. In Germany many sectors, particularly manufacturing, can continue to operate with relatively fairly little disruption”, Köhler-Geib added. “I therefore expect only a moderate decline in economic output in the current quarter. But there is still a long winter ahead, and the downside risks are therefore high.”

“Over the summer, the German economy grew by 8.2% – a lonely new record that in normal times would be celebrated as a dream result! Unfortunately, these times are anything but normal. The historic growth spurt is little more than a mechanical counter-reaction to the previous even deeper slump: as a result of the shutdown of numerous economic activities, the economy crashed historically in the spring; with the successful containment of the first wave of Covid-19 infections and the resulting far-reaching withdrawal of restrictions from May onwards, a considerable part of this slump was made up for. But now the infection figures are already skyrocketing again. We will therefore only get through autumn and winter relatively unscathed if we break the swelling second wave in time. That is the aim of the new measures taken by the federal and state governments. Their success also depends on the contribution of each and every individual so that this partial lockdown suffices to break the new infection wave. I consider a success if we are able to prevent a further major decline in GDP in the winter half-year; in the best case scenario, economic growth would only flatten out considerably. To this end, I am counting on the recovery in industry remaining strong enough to compensate for the inevitable setbacks in the services sector.”

“SMEs in Germany, however, generally have strong financial resilience. In the past years, companies have built high levels of equity, which now benefits them. The average equity ratio even reached a new record high of 31.8% in 2019."

“Despite the comfortable starting position of most small and medium-sized enterprises in Germany, the coronavirus crisis will leave an imprint – not just on SMEs’ balance sheets but also in the minds of entrepreneurs. The actions of many might be guided by caution and restraint in the period ahead. It is important to respond to this with targeted economic-policy measures that reduce uncertainty while creating incentives to seize the opportunities presented by the crisis.”

KfW SME Panel 2020 (PDF, 1 MB, non-accessible)

“Autumn has hardly begun and the number of people infected with corona is shooting up alarmingly. This shows that we are still in the middle of the crisis –economically too. The economic recovery in the summer may not hide this fact. The countermeasures introduced by the federal and state governments are necessary to prevent a second Germany-wide lockdown. As hard as the restrictions affect many, they will prevent worse. It is likely that the economic upturn will largely come to a standstill by the spring. As a result, unemployment is also expected to stagnate in the coming months or – if things go badly – increase significantly. The employment risks remain high, especially in customer-related economic sectors. The autumn and winter months will once again prove to be a particularly severe test for the hotel and restaurant industry, as well as for parts of the retail sector and the cultural industry. However, there are also sectors in which employment is still being built up during the crisis. This applies, for example, to the economic sectors of information and communication, education and training, healthcare and the construction industry. Next year, the upturn in the growth sectors in particular is likely to be slowed down by a shortage of skilled workers. For this reason, the unemployed and employees from crisis sectors who are willing to change jobs need to be supported in qualifying for occupations that require additional employees. It is also particularly important to win over the large number of short-time workers for future-oriented training.”

“The interaction of the pandemic and government guarantee programs is shaping the European corporate credit market. Overall, credit growth in September was stable at a high level for the fourth time in a row. However, this conceals very different developments in individual euro countries. While in Germany, the momentum slowed down significantly with a very calm flow of infections, the banks in the other three major euro countries again extended more funds to companies. In Spain and France, the increasing number of new infections was probably the reason. In the meantime, the economic impact of the pandemic is growing daily in this country as well. In the service sectors that have been particularly affected, such as hospitality, the financial bottlenecks and thus the need for credit are likely to increase again. In this difficult situation, the ECB, just like the governments, is now called upon to strengthen the confidence of companies and consumers by extending and selectively supplementing the crisis measures.”

“Everything seems like a déjà-vu experience. The number of infections is shooting up again and the containment measures are constantly being tightened. Some of our European neighbours are even ordering curfews and store closures again. It is therefore not surprising that the business climate is also clouding over. The speed of the increase in infections is alarming, but the situation is still different from the spring: thanks to the increased number of tests, the undetected cases are likely to have decreased significantly and it has so far been possible to better protect high-risk groups. We are still cautiously optimistic that the increase in new infections in Germany can be slowed down without the most economically damaging measures, such as comprehensive business closures. However, this also depends on the contribution of each individual. The manufacturing industry in particular is likely to come off better this time than during the first wave of infection, as it is likely that as few economic activities as possible will be curtailed among European trading partners. Nevertheless, the foreseeable restrictions mean a significant setback for the service industries, such as the hospitality sector in particular, which were already severely affected in the first wave.”

“The current KfW-ifo SME Barometer highlights the continuing rise in confidence levels in September as well, which is certainly good news that can allay excessive fears of an economic setback”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Nevertheless, the renewed, considerable increase in the number of new coronavirus infections is becoming a growing obstacle for the economy as the cold season begins. The health response and economic support measures must now focus on ensuring that the economic rebound will still continue at a satisfactory pace even after the foreseeable record growth in the third quarter. To a large extent, the German population itself holds the key to preventing renewed large-scale lockdowns by being sensible and considerate, and by consistently complying with infection-control regulations. What is raising growing concerns, however, is the spread of infections in many other important countries around the globe – particularly with a view to the domestic export industry and its focus on cyclical capital goods”, said Köhler-Geib.

KfW-ifo SME Barometer September 2020 (PDF, 129 KB, non-accessible)

“The economic recovery noticeably improved the labour market situation in the summer. The feared rise in unemployment to above the 3 million mark appears to have been averted for the time being. Due to seasonal factors, unemployment should fall by the end of the year. However, we can assume that the number of infections will rise again in the autumn. This could lead to a further slowdown in the economic recovery. Setbacks are also possible if stricter government regulations on social distancing become necessary in Germany and Europe and consumers spend less out of fear of infection. A further slump in economic activity is unlikely, as people in Germany are generally behaving in a disciplined manner and the findings from the spring allow a more regionally targeted approach to the pandemic. Next year, the shortage of skilled workers will become noticeably more important again as a barrier to economic recovery. It is therefore crucial for the further recovery that short-time workers and the unemployed receive training in line with market requirements. Otherwise, there is a risk that qualifications will expire and the unemployed will be demotivated if they remain inactive for a longer period of time. Moreover, the crisis acts as a catalyst that accelerates structural change. The digital and ecological transformation places new demands on employees and companies, far beyond the automotive industry. For this reason, we must take seriously the risk that the underemployment created in the corona crisis could become entrenched without increased qualification and that the shortage of skilled workers could increase."

“Lending to European companies remained stable at a high level in August. However, in line with the stabilisation of the economic situation, I expect the credit market to calm down in the future. In order to cushion immediate financial distress caused by the abrupt corona shock, borrowing was a lifeline for many companies. Now, with the recovery, the focus is increasingly shifting to adapting to the changed realities. However, a renewed surge in demand for credit cannot be ruled out. The rising incidence of infections and new local containment measures are causing uncertainty to grow again. Therefore, largely unimpeded access to credit for companies with functioning business models remains an important goal.”

“The initially strong momentum of the economic recovery is ebbing down, the number of people newly infected with Corona is rising – an unhealthy mixture at the beginning of autumn! So the fifth business climate increase comes just in time as a signal of calming down. Nevertheless: the easy part of the recovery is over. Both health policy and economic policy efforts must now focus on ensuring that the economic improvement continues at a satisfactory pace even after the expected record GDP growth in the third quarter. It is largely in our own hands to avoid further large-scale lockdowns by exercising common sense, consideration and consistent compliance with infection control regulations. With regard to our export economy, however, I am somewhat concerned about the incidence of infection in many other important countries.”

“I assume that the Governing Council will largely maintain the current monetary policy course on Thursday. The monetary policy measures taken before the summer break have so far achieved their intended effect. In July, corporate loans in the euro area recorded one of the highest values in the past ten years, thus helping to cushion the crisis. In addition, the spreads between German government bonds and the bonds of other euro area countries are currently moving along quiet lines. At the same time, however, the pace of economic recovery has slowed down and economic policy uncertainty remains very high. In reviewing its monetary policy strategy, the ECB will also take into account the recently announced strategy adjustment of the US Federal Reserve.”

“After business sentiment shot up when the coronavirus restrictions were relaxed from May onwards, initially in record-breaking leaps, we are now seeing a clear reduction in the pace at which sentiment is improving”, comments Dr Fritzi Köhler-Geib, KfW’s Chief Economist, on the current findings of the KfW- ifo SME Barometer. “The easy part of the recovery is over. Continuing the trend towards pre-crisis levels of economic activity as autumn and winter approach is going to be tougher.” Export-oriented industry, in particular, will need to adjust to the growing demand-side headwinds. “As rates of coronavirus infection continue to increase rapidly around the world, uncertainty remains extremely high and it is putting a brake on companies’ domestic and international investment activity. Germany’s export industry, which specialises in high-quality capital goods, is feeling the impact of this particularly heavily.”

Furthermore, we are likely to see unemployment in Europe continue to grow in the short-term, which will in turn affect consumption and, in particular, sales of durable goods such as cars, for example. In Germany too, it is anything but certain that all those affected by short-time work will in fact be able to return to their original places of work. “For a seamless recovery, it is therefore important that as many people as possible use this phase of short-time work for professional development and, for instance, to improve their digital skills,” says Köhler-Geib.

“The high increase in long-term financing is good news for the stability of the economic recovery. Longer maturities give enterprises more financing certainty and allow them to distribute the weight of their losses from the crisis over longer periods. This improves the prospects for the long term continuation of their operations.”

KfW Credit Market Outlook September 2020 (PDF, 88 KB, non-accessible)

“The economy has regained momentum. The situation and expectations have improved dramatically in all economic sectors since May. The rapid recovery is largely due to the largely stable income development. Gross hourly earnings paid by employers in the second quarter were 2.6% higher than in the previous quarter. This stabilises purchasing power during the crisis and supports private consumption and housing construction. However, not all sectors are participating in the upswing to the same extent, as is clearly apparent in the retail sector. In June, retail sales were already 5.9% higher in real terms than in the previous year. Sales in the textiles, clothing, shoes and leather goods segment were still 16.0% down on the previous year, however. And in the hotel and restaurant sector, sales were still down 42.2%on the same month. It is therefore much too early to give the all-clear and this also applies to the job market. There are still almost 3 million unemployed and over 5 million short-time workers and companies are still hesitant to hire. The greatest risk for the upswing is and remains the further course of the pandemic. The rising infection figures must therefore be taken seriously. If the infection rates threaten to get out of control again, tighter protective measures may become necessary – with serious consequences for the economy. It is therefore important to investigate where the new increase in infections in Germany comes from and what each individual can do about it. In order for the recovery to prevail, companies will also have to overcome their reluctance to hire again. The obstacles to this are reluctant hiring behaviour and difficulties in finding suitable employees – a situation that is exacerbated by declining immigration of foreign workers and declining labour force participation. All this is due to the crisis. For the further upswing it is important to remove barriers to starting work or training so that the economy is not slowed down by a shortage of skilled workers. Also with a view to 2021 and the following years, high priority must be given to securing the supply of skilled workers. Otherwise, demographic developments and weak productivity in Germany could become a serious obstacle to climate- and environmentally compatible growth.”

“The European corporate credit market continued its strong upward trend in July, lending only slowed down slightly compared to the previous month. We have made good progress in the economic recovery everywhere in Europe in recent months but the rising infection figures clearly show that we are still in the middle of the pandemic. Supported by government guarantees, bank loans therefore remain an essential instrument to enable companies to maintain their business operations. This is enormously important for stabilising economic development but it comes with side effects. The level of indebtedness of European companies will rise, reducing their financial scope for future investment and innovation.”

“This morning Destatis revised the historical slump in GDP to -9.7% in the second quarter and published its first estimate for public finances in the first half of the year. The Corona crisis has caused the national budget to slide deep into the red for the first time in eight years. That is as expected and a good thing. Public money has been well invested in the rapid and extensive stabilisation measures, as underscored by the continuing upswing in sentiment. The business climate improved in August for the fourth time in a row. This success must be maintained at any rate in view of the renewed significant rise in contagion. Reason, mutual care and strict adherence to infection control rules are the key to ensuring that the economic recovery continues. After all, the precrisis level is still a long way off, and the continuing global rage of the pandemic remains a major risk for us as an export nation.”

"With skills shortages increasing in Germany, SMEs are looking to go new ways in recruiting workers. In addition, the entry of digital natives with their specific communication behaviour into the workforce is a driver of increased social media activity. The contact restrictions imposed by the coronavirus crisis are likely to lead to a further surge in the use of social media to hire employees, since traditional recruitment measures such as open days or educational fares cannot take place at this time. In an international comparison, German SMEs are only in the lower mid-range in the use of social networks to recruit skilled workers."

To the publication Social media – a tool for SMEs to recruit talent (PDF, 94 KB, non-accessible)

“After plunging into an abyss in April, small and medium-sized enterprises have managed quite a decent relaunch”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The fact that businesses were able to avoid falling into a depression after the deep slump is also thanks to the decisive public health and economic policy response to the pandemic. Many small and medium-sized enterprises were able to ride out the lockdown with grants and assistance loans. Furthermore, the brighter sentiment is not driven by expectations alone but has been bolstered by an improved business situation again since June. After the historic slump in the first half, the course is set for strong growth in the summer quarter.”

However, headwinds are also gathering strength. “Continuing high global infection rates are hurting export-oriented manufacturing in particular. Given the enormous uncertainty and crisis-induced losses, many businesses will spread out or defer their investment plans. The recent rise in new infections in Germany also poses a risk to almost all sectors.”

“With the data released today, it is now official what immediate economic devastation the first wave of infection left behind in the eurozone. Yet there are significant differences between the countries. Where the strictest containment measures were taken, the economy has collapsed most deeply. As countries with above-average unemployment have been hit particularly hard, the economic gap in the euro area threatens to widen further. That is why it is so important for the economy and cohesion that the European Council was finally able to agree on a recovery fund. In addition, the decisive public health response has at least succeeded in containing the virus in Europe relatively quickly. A significant recovery was thus able to commence in May, which will become apparent in the current summer quarter. The recent increase in the number of cases, particularly in Spain but also in Germany and France, is the greatest risk. This is true even though new containment measures can probably be more targeted today and thus less harmful from an economic point of view than in the spring.”

“The Corona crisis is subjecting the German labour market to a stress test. In terms of gross domestic product, the low point of the economic crisis was probably reached in the second quarter. However, this will hit the labour market with a delay of several months, as some companies will still have to lay off some of their short-time workers. At 44.6 million, the average number of people in employment in 2020 is likely to be 700,000 lower than in the previous year. The peak in unemployment could be reached in the third quarter with around 3 million unemployed persons. By the end of the year, the upward forces could then also assert themselves on the labour market. The economic stimulus provided by the federal government's extensive economic stimulus package should make a noticeable contribution to companies investing more again and thus also creating new jobs. The annual average for 2020 should be around 500,000 more unemployed persons than in the previous year. The unemployment rate is expected to rise from 5.0% in 2019 to 6.1% in 2020. In 2021 it could then be somewhat lower again at 6.0% as employment increases. However, the risks are considerable. An essential prerequisite for an improvement in the labour market is that the infection rate remains low as a result of the protection measures and through common sense and consideration for other people. If a second wave of infection triggers an economic setback in Germany or in important foreign markets, job cuts may also increase. In addition, many companies are looking for new business models and want to reduce their costs in the longer term because of a continuing decline in earnings. This may also result in layoffs. This is why it is so important that everything possible is done to get the economy back on track, to tackle the structural challenges and to ensure environmentally and climate-friendly economic growth. We should all bear in mind that it is a matter of both preserving human life and securing our prosperity and jobs.”

“With -10.1% compared to the previous quarter, the collapse in gross domestic product in the second quarter of 2020 announced today is truly historic. The largest quarterly decline to date at the peak of the financial crisis with -4.7% was doubled, as the containment of the first wave of infection in the spring required a previously unimaginable shutdown of many economic activities. Nevertheless, the negative record is likely to be followed by exceptionally high growth in the current summer quarter, as the economy picked up quite quickly from May onwards with the gradual lifting of the containment measures. However, after the initially almost mechanical recovery from the supply side, the pace of recovery should soon slow down again. Export-oriented industry in particular must expect a strong headwind in view of the continuing high global infection dynamics. In addition, in view of the high level of uncertainty and the losses incurred as a result of the crisis, many companies will stretch or postpone their investment plans.”

"A three-fold change in the business climate in the same direction signals a turnaround – according to this well-known rule of thumb, Germany is now finally on the road to recovery, as business sentiment rose in July for the third time in a row. The economic start to the summer quarter has thus been successful. GDP growth is likely to be exceptionally strong in the third quarter, albeit after the economy collapsed historically in the spring as a result of the corona measures. I expect Destatis to announce a near double-digit percentage drop in GDP for the second quarter next Thursday. Despite the encouraging signs of late, it is too early to give the all-clear: the pre-crisis level will remain a long way off for the foreseeable future, and the continuing fierce rage of the pandemic in large parts of the world is an enormous risk for Germany as an export nation."

"After the strong increases of the previous months, a certain slowdown in the growth of European corporate loans was to be expected. This is not an alarm signal, as the easing of pandemic measures has helped to somewhat relieve the liquidity situation of companies and, through strong issuance activity in the bond markets, large companies have been able to find alternative sources of financing. Although the peak in credit dynamics has probably been passed, a functioning credit channel remains crucial for the recovery of the economy in the coming quarters after the corona shock. So far, unlike during the financial crisis, banks in the eurozone have largely been able to avoid tightening credit standards. The most recent survey of financial institutions by the ECB clearly shows how essential government loan guarantees were in this respect in the countries that were particularly hard hit. The exit from this important support measure should therefore be undertaken with caution."

"The latest economic data indicate that the economy in the euro zone has started to pick up again since May. Nevertheless, further development remains fragile against the background of a significant global increase in new infections. Due to a high under-utilisation of production capacity for the foreseeable future, price pressure will remain low for a long time. As a result, the high degree of expansion of monetary policy is appropriate. However, after the bonfire of innovative measures, the Governing Council will probably take a breather next Thursday. However, changes to individual parameters are quite possible. For example, the ECB could increase the allowance for excess reserves in order to further support the banks in the Corona crisis."

“Considering the significantly increased loan default risks due to the deep recession, the difficulties which SMEs are experiencing in accessing credit are still limited. During the global financial crisis of 2009, more than 40% of the surveyed small and medium-sized manufacturing firms complained about credit constraints. Financial institutions are in better shape today, and at the same time the comprehensive economic support measures are helping to reduce the negative effect on banks’ willingness to lend during the current crisis.”

“The trough of the recession which hit Germany, Europe and the world without warning as a result of the coronavirus pandemic now lies behind us with the second quarter. The June findings of the KfW-ifo SME Barometer demonstrate that businesses are climbing out of the deep cyclical low step-by-step”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Germany’s economy likely saw a nearly double-digit percentage fall in output from April to June, and it is now back on the path of recovery. But it is a narrow path where risks of renewed collapse lurk in spite of massive economic protection measures”, Köhler-Geib added. “The local increase in new infections demonstrates impressively how dangerous the virus still is, not just globally but in Germany as well. Let us hope that such local virus outbreaks can be contained in time with local quarantining and lockdown measures before they can spread. “It is crucially important that we remain vigilant and maintain discipline in complying with hygiene rules to prevent a renewed economic setback from a second wave of infections."

“The outlook for entrepreneurial activity in 2020 was positive but has been clouded by the coronavirus pandemic. I expect some of the start-up plans to be put off in response to the current threat facing the livelihoods of many self-employed professionals”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “But the crisis will also act as a driver of entrepreneurial activity. With unemployment rising as a result of the crisis, the number of necessity start-ups – new businesses created for lack of better income alternatives – will rise. It remains to be seen which effect will ultimately prevail.”

A closer look at the structure of entrepreneurial activity reveals positive trends. Innovative start-ups and fast-growth start-ups increased moderately (from 11% to 13% and from 24% to 25% of all start-ups). There was a noticeable increase in Internet-based and digital start-ups (from 25% to 32% and from 22% to 28%). “The trend towards more innovative, digital and Internet-based start-ups is positive because they create new markets, drive structural change and strengthen our economy’s competitiveness”, said Dr Fritzi Köhler-Geib.

KfW Entrepreneurship Monitor 2020 (PDF, 623 KB, non-accessible)

"The business climate has improved significantly from a very low base in all economic sectors since the end of the lockdown. Most companies expect better business in the second half of the year, even though demand and supply chains are still impaired and concerns about the future are often still high. The revived business activity has enabled many short-time workers to extend their working hours again. Nevertheless, the number of unemployed people is likely to continue to rise in the coming months as there will be more redundancies and companies are hiring fewer people. As a result, the number of reported job vacancies in May was with 570,000, more than 200,000 lower than in the same month last year. Unemployment has especially increased among workers without vocational qualifications and young people. In the coming months it will be important to ensure that unemployment does not become entrenched and lead to permanent disadvantages. To this end, apprenticeships and training opportunities must be created in greater numbers. The conditions for this are not easy. Many companies are unable to provide training because of economic problems. And the need for social distancing poses more or less major challenges for companies willing to provide training. This is why innovative solutions are also needed for schooling and vocational training."

"The strong flow of credit to European companies has continued in the midst of the historic Covid-19 recession. This is a success of the comprehensive economic policy stabilisation measures. The aid for banks, companies and the economy as a whole has an effect beyond the direct beneficiaries and is mutually reinforcing. The interplay of two instruments is particularly important for maintaining an open credit channel: firstly, the ECB is providing targeted incentives for lending to households and companies with extremely attractive conditions for longer-term refinancing transactions (TLTRO-III). Right from the first round in June, demand from banks for these funds was enormously strong at over 1,300 billion. Secondly, the credit guarantees of the European states reduce the risk of losses not only for the financial institutions but also for the national economy. According to an analysis by the ECB, up to 20% of expected credit defaults can be avoided in this way".

“Companies are working their way step by step out of the deep recession valley. Their mood is rising strongly for the second time. The way back up, however, follows a narrow path on which, despite massive economic policy safeguards, one must always beware of the danger of falling. The recent increase in new infections is a powerful reminder of how aggressive the virus still is in Germany. It is to be hoped that local outbreaks can be contained in good time with local quarantine and lockdown measures before they spread to the rest of the population. In any case, vigilance and discipline in observing the rules of hygiene continue to be urgently required to prevent another fall. The new Corona Warning App is a useful building block in this respect.”

“The coronavirus crisis has a grip on Germany’s SMEs. The losses in turnover are serious and probably amount to a good EUR 250 billion in the months of March to May. The path out of the coronavirus slump will be long and arduous”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Looking ahead, though, we can be cautiously optimistic. With the government’s comprehensive coronavirus response and progress made in containing the spread of infections, and with the adjustments companies have made to their business models and product assortments, Germany is on a good path. What matters most now is to have faith in a sustainable recovery. The Federal Government’s new economic stimulus package provides welcome impetus for this.”

But Köhler-Geib also stressed the need to closely monitor the development of SMEs’ liquidity position. “A large number of small and medium-sized enterprises continue to feel great pressure on their liquidity, so the threat of insolvency has not been averted despite the relaxation of coronavirus restrictions.”

“The coronavirus pandemic and the disruptions it has brought to business activity left a clear mark on the first quarter already, and this will dominate developments in the corporate credit market until the end of the year. Economic output during the weeks of the lockdown in the second quarter was probably just 75-80% of the normal level. Even if the recovery has since begun, it is unlikely to climb back to the pre-crisis level until 2021. The funding requirements of businesses to overcome the shock therefore continue to rise, as does their demand for bank loans, the most important borrowing instrument. I expect new lending to businesses to increase by around 10% in the current quarter. In addition to drawing on credit lines, newly negotiated bridging loans – which include the KfW coronavirus support programmes – are likely to become just as important as the suspension of repayments.”

“The findings of the KfW-ifo SME Barometer since March resemble a rollercoaster ride with a steep downward slide followed by a comparatively short climb in May. Even if the current sentiment improvement was exceptionally strong from a historic perspective, it is not more than a sigh of relief over the most recent slowing of the coronavirus crisis, which now permits businesses to take a less pessimistic view of the near future. Germany is on a good path with its comprehensive coronavirus response, economic stimulus package and successes achieved in containing the spread of infections. But getting out of the coronavirus slump will take a long time. Hygiene requirements, which must remain in place, have to be complied with in order to prevent further outbreaks. New confidence in the future is the key to a successful outcome.”

“The business climate has finally arrived in the corona valley. The historic decline in the assessments of the current situation as a result of the lockdown – necessary to contain the pandemic – under-scores the fact that we must prepare ourselves for the second quarter to see the worst slump in economic output since the Federal Republic of Germany came into existence. I expect GDP to decline by between 10 and 15% compared to the previous quarter. Even though business expectations do not yet inspire hope, I am confident that we will see the beginning of a recovery as early as the second half of the year. The prerequisite, however, is that we are now very prudently restarting economic and social life without jeopardising the health successes. The comprehensive protective umbrella provided by the Federal Government, the federal states and KfW is helping the enterprises to maintain their productive potential beyond the crisis as intact as possible.”

" In order to cushion the pandemic-induced collapse in corporate sales, state-supported aid loans play an important role in European governments' policy packages. However, whether the credit-based funds actually flow depends above all on the willingness and ability of banks to shoulder the rising credit risks. According to EBA estimates, losses for financial institutions could amount to 3.8% of risk-weighted assets. That is significant. So it is good news that eurozone financial institutions have reported another strong expansion in corporate lending. Now it is paying off that the banking system has been crisis-proofed by stricter regulatory requirements after the experience of the financial crisis. Getting the economy back on track after the abrupt shock has subsided, however, will take a lot of patience. To ensure that the necessary funding is made available for this purpose, further targeted risk relief for banks in their lending activities is advisable."

“Exceptional times require exceptional monetary policy measures. This applies to the ECB as well as the Fed or Bank of England, which have all intervened heavily in the sovereign bond market since the corona crisis. At its meeting on Thursday, the Governing Council may discuss whether the ECB capital key should be abandoned as a medium-term guideline for securities purchases under the pandemic emergency programme PEPP. As the corona shock hit individual countries such as Italy, Spain and France particularly hard, they also need targeted support. The interest rate level in Germany would then be less affected. On the other hand, the Federal Constitutional Court, and also the European Court of Justice, have defined the orientation towards the capital key and a limited volume of securities purchases as important boundaries to monetary public financing. A "recovery fund" in line with the Franco-German initiative or the proposals of the EU Commission would in any case take some pressure off the central bank.”

“The companies acknowledge the easing that has begun with a sigh of relief – and rightly so! Thanks to the discipline of the population and the general acceptance of containment measures necessary for public health, also on the part of companies, Germany is on the right path. However, this path out of the Corona Valley is still a long one and will only run smoothly if the further necessary hygiene requirements are met. To complete it successfully, new confidence in the future is the key. In order to strengthen and consolidate the coming recovery, it is therefore essential to quickly draw up a growth and investment programme that takes into account the structural challenges facing the German economy and conveys a clear vision of sustainable economic development.”

“The coronavirus crisis in Germany abruptly ended the very good sentiment in the VC market”, said Dr Friederike Köhler-Geib, Chief Economist of KfW. “Experience has shown that in times of crisis, VC investors focus on portfolio maintenance and put off new investments for the time being. That puts downward pressure on the level of investments. But now in particular, it is important not to leave the very good start-ups that are still searching for VC investors out in the rain. Otherwise, they will have difficulty getting through the capital-intensive time to market. Losing a start-up generation would be a heavy hit. The very good fundraising climate of past years should actually make it possible to bridge this situation.”

German Venture Capital Barometer 1st Quarter 2020 (PDF, 131 KB, non-accessible)

“With minus 2,2% in the first quarter, Germany still got off lightly. This reflects the fact that the lock-down came later than in the other euro countries and was also less comprehensive. Most business closures were only ordered from the last week of March onwards. From that point on, economic output is likely to have been 20–25% below normal levels for several weeks, with interruptions in the manufacturing sector, which was only indirectly affected, also playing a major role. We must therefore expect much worse figures for the second quarter. For the year as a whole I expect a decline of -6%. At least we should already have passed through the Corona Valley as long as a second wave can be avoided. Nevertheless, the road back to pre-crisis levels is a long one, especially for manufacturing, which has to struggle with a massive global investment slump due to the enormous uncertainty.”

“Municipalities already had high investment requirements before the coronavirus crisis”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “We face a catastrophic prospect if their budgetary scope now shrinks and investments are therefore put on hold. Germany needs public investment in modern infrastructure in order to overcome the consequences of the crisis and as a prerequisite for maintaining the country’s prosperity. Adapting the infrastructure to climate and demographic change alone is a Herculean task.”

KfW municipal survey: Slump in revenues expected, investment under pressure (PDF, 143 KB, non-accessible) (only in German)

“The coronavirus crisis has hit Germany like a bolt of lightning”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The rebound is likely to begin already in the second half of the year, but we probably won’t return to pre-crisis levels until autumn of 2021. The cost of the crisis in lost economic output will then be roughly EUR 300 billion.” That is roughly equal to the gross domestic product of Denmark.

“Without the swift fiscal and monetary policy response, the recession would be even more devastating”, said Köhler-Geib. “Grants and bridging loans as well as a range of adjustments to banking regulation as well as rental and insolvency legislation are helping the business community. The short-time work allowance is reducing fixed costs, protecting jobs and bolstering domestic demand. A large portion of businesses is likely to come out of the crisis with bruises, but they will survive. However, all measures can only bridge the lockdown situation. We must now find ways to protect both lives and livelihoods by conducting rapid tests, tracking infection chains and putting in place behaviour protocols.”

KfW Business Cycle Compass Germany and Eurozone (PDF, 109 KB, non-accessible)

"Without a doubt, the findings of the KfW-ifo SME Barometer for April are depressing. On average, all individual indicators surveyed have fallen by around ten times the typical monthly variation”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “This shows us impressively the far-reaching economic impact of the mandatory shutdown of broad areas of life which was necessary to protect public health. As the historic slump in the business climate is due to the very special circumstances of the coronavirus pandemic and not driven by any genuinely economic factors, sentiment should be able to rebound relatively swiftly once we can ease our foot off the brakes. All confidence-building measures that serve equally to protect human life and livelihoods will be crucial, such as rapid testing, reliable contact tracing and hygiene strategies. After all, people will not fully participate in economic and public life again until the risk of contagion is as low as possible and predictable. I am confident that we saw sentiment bottom out in April thanks to the comprehensive coronavirus containment strategy, the successes achieved since March in stopping the spread of infections, and the now announced or already implemented easing of restrictions. We can expect economic growth to start to rebound in the second half of 2020.”

“Digitalisation is increasingly reaching all areas of the German SME sector, but the vast majority of small and medium-sized enterprises continue to take small steps”, Dr Fritzi Köhler-Geib, Chief Economist of KfW Group, summarised. “The ongoing coronavirus crisis will mark a turning point and act as a catalyst of digital transformation in the SME sector. The competitive advantages resulting from digital business models, products and processes are now becoming particularly clear. They have allowed the uninterrupted operation of many businesses that would otherwise have ground to a halt because of the coronavirus restrictions. Many businesses are now suddenly forced to go digital. They are trialling work-from-home arrangements and virtual cooperation, setting up digital sales platforms as shops and restaurants remain closed, or are replacing paper-based processes with digital ones. Much of this will remain after the crisis – and grow.”

KfW SME Digitalisation Report 2019 (PDF, 865 KB, non-accessible)

“The labour market is under the spell of the Corona crisis – and this will continue throughout the year. Business closures, business restrictions, lack of demand, disrupted supply chains and travel restrictions add up in their impact and have triggered a deep global recession. In Germany, more companies than ever before have announced short-time work. Unemployment has also risen considerably, although the increase has so far been limited thanks to the extensive expansion of short-time work benefits. Future developments depend heavily on political decisions in Germany and abroad. Among other things, these are guided by how the infection rates develop, how well even relaxed conditions are adhered to and how the conditions affect the economy. The easing in May is an encouraging first step, which is already improving the financial situation of many companies and employees.”

“The flash estimate for growth in the euro area over the first quarter provides the first hard economic data, which also include the effects of the corona crisis in March. It can be assumed that the euro area was still growing at an average pace in January and February. The big slump only started when the pandemic spread to Europe and the various national lockdowns were implemented. From the 3.8 % fall in GDP in the first quarter, it can be concluded that the containment measures have stifled the euro area economy by an average of 17 % in the last three weeks of March. The figures from the first quarter are therefore only a taste of what we can expect in the second quarter. We expect a slump of around 15 % and a gradual recovery from this low point.”

"The March ECB data on credit and monetary developments clearly show the economic impact of the pandemic. Monetary growth has accelerated sharply, mainly driven by an expansion of credit to the corporate sector. Overall, European banks provided 5.4% more funds to companies than a year ago. In February it had been only 3%. The immediate impact of the pandemic at the beginning of the European outbreak is reflected less in credit growth itself than in its acceleration. This is the strongest pace of growth in a month in lending to businesses in the euro zone to date. I see this as a positive signal, as banks are lending to businesses. It shows that government loan guarantees, flexibility in bank regulation and the ECB's ample liquidity are working. This is a major contribution to limiting the number of corporate insolvencies and minimizing the longer-term damage caused by the Corona crisis."

“The reported decline in GDP in the first quarter compared to the previous quarter was, at an annualized rate of 4.8 %, even clearer than already feared. This shows the severity of the recession there, as the decline essentially results from the second half of March alone. For the current second quarter, a far more significant slump in economic activity is already apparent. It is unlikely that there will be a very strong rebound in the second half of the year. Although the Americans are and will remain very willing to consume and could therefore meet the easing of the containment measures with stronger demand than consumers in other parts of the world do, the catastrophic situation on the US labor market will significantly dampen this effect. However, in my opinion one advantage remains for the US economy in the recovery: The US is less interconnected internationally than Germany, for example, and therefore less exposed to recessions in other countries. Looking at the year as a whole, however, the US will not be able to avoid a noticeable decline in GDP.”

“With its substantial asset purchases, the ECB is doing all it can to keep the monetary transmission channel open. To do so, it needs the greatest possible flexibility. The ECB's Governing Council will therefore probably discuss an expansion of the "PEPP" purchasing program this week, especially since other major central banks are currently making much greater efforts in terms of "QE". This Monday the Bank of Japan also raised its limit on government bond purchases. The PEPP increase at the moment would be a precautionary measure, but it would presumably mean further relief for the government bond market. Last week, the ECB eased the requirements for collateral in repo transactions. The decisions made by EU leaders last Thursday show that governments and the ECB are working in the same direction in crisis management.”

“The business climate has finally arrived in the corona valley. The historic decline in the assessments of the current situation as a result of the lockdown – necessary to contain the pandemic – under-scores the fact that we must prepare ourselves for the second quarter to see the worst slump in economic output since the Federal Republic of Germany came into existence. I expect GDP to decline by between 10 and 15% compared to the previous quarter. Even though business expectations do not yet inspire hope, I am confident that we will see the beginning of a recovery as early as the second half of the year. The prerequisite, however, is that we are now very prudently restarting economic and social life without jeopardising the health successes. The comprehensive protective umbrella provided by the Federal Government, the federal states and KfW is helping the enterprises to maintain their productive potential beyond the crisis as intact as possible.”

“We are launching the new KfW ifo Credit Constraint Indicator in troubled times but at the right moment”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “it will give us answers to the question whether SMEs will continue to have access to credit even during the coronavirus crisis. The share of enterprises currently in loan negotiations also allows us to identify trends around credit demand. The measures required to contain the pandemic have brought broad sections of the economy to an abrupt standstill. In order to prevent longer-term damage and enable the economy to recover quickly, a functioning supply of credit to businesses through the banking system will be crucial. The liquidity assistance being provided with KfW’s participation is therefore an important contribution to the German Federal Government’s overall package of measures”, said Köhler-Geib.

“Start-up activity in Germany picked up again in 2019 for the first time in five years. The year 2020 will show whether an increase in necessity start-ups or a decrease from the discontinuation of start-up plans will predominate, given the deep anxiety which the coronavirus crisis is causing for self-employed persons in particular”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “State liquidity aid and support for short-time work will help businesses and self-employed persons for now. What is also encouraging is that many self-employed persons are reinventing themselves out of necessity and adapting their business models to the acute challenges. But what is crucial is that all contribute with their behaviour to keeping the current state of emergency as brief as possible. More will then get through this crisis.”

"Even if the figures now published do not reflect the effect of the corona crisis, there is nothing to sugarcoat the current situation. In addition to disease, there is a serious loss of production and income, which could last for several weeks or months. However, for many employees in Germany the effects will be limited to temporary losses of work and earnings. This is not least due to the decisive measures taken by the German government. In addition, in view of the shortage of skilled workers that has been observed for some time, many companies are very interested in keeping their employees on the payroll, especially in order to be able to meet demand quickly during a recovery.

As in the financial crisis, the German government has considerably expanded the allowance for short-time work. This cushions loss of earnings and relieves companies of wage costs and social contributions. In addition, the Federal Government and KfW have launched financial aid packages of unprecedented dimensions. These help particularly affected enterprises overcome liquidity bottlenecks and protect them from insolvency. Of course, this also helps to avoid a sharp rise in unemployment.

We should be clear about one thing: How long the current state of emergency will last depends on people adhering to the restrictions imposed by politics on their working and social lives. This not only saves lives but also makes a decisive contribution to our economy overcoming the crisis as quickly as possible and largely unscathed."

"The ECB publishes the latest figures on European bank lending with the usual delay of four weeks. In times of Corona, that's an eternity. The February figures do not yet reflect the effect of the pandemic. In order to limit the foreseeable economic consequences, access to credit must remain open for financially sound companies and households. The chances are good, as supervisors, monetary policy, governments and promotional banks are working hand in hand to increase financial institutions' scope for lending. The capital relief provided by European banking supervision alone will release enough capital to allow additional bank loans of up to EUR 1.8 trillion to be granted. This represents around 15% of the outstanding loans to the private sector in the Eurozone.”

“The slump in the preliminary ifo business climate is inevitable, because the economic costs of the corona crisis are omnipresent. Due to the social distancing to contain the virus many service companies have to temporarily stop business completely. But industry also suffers from a slump in demand, the absence of employees and disrupted supply chains. It is easy to imagine that economic output will slump by 10 to 15 percent in the second quarter. The main problem is the enormous uncertainty as to when a return to normality will be possible. The main thing now is to ensure that companies do not go bankrupt but are put into a kind of hibernation with reduced or no business activity until the virus is under control. Then we might be able to achieve the same level of economic activity in a year's time as at the beginning of this year. The Federal Government has ensured that KfW, together with the banking industry, can provide companies with liquidity quickly and effectively.”

"The coronavirus outbreak in Europe has completely changed the situation in comparison with the last ECB decision on 23 January. At that time there was hope that the economic weakness in the euro area would end but now there is no longer any question of that. Instead, worst-case scenarios are currently being played out on the financial markets. The Governing Council will make a constructive contribution to mitigating the consequences of the virus outbreak on the financial and real economy. Financial conditions remain, for the most part and the time being, still very favourable. A further interest rate cut would therefore have more of a symbolic value and would signal that central banks around the world are pulling in the same direction. In order to ensure that financing remains cheap throughout the euro area, the ECB could increase its purchases of securities as long as the fears of a virus persist. In the short term, however, liquidity aid and support for short-time working will probably be key for companies – and this is where governments come in.”

Last year, China was not only the third most important destination of German exports but, above all, the main country of origin of German imports. “SMEs’ stronger focus on the German and European internal market makes them less susceptible to global developments. But even if their confidence remained strong in February, they are not immune to the effects of the coronavirus outbreak. Ever since the virus began to spread in Italy, we have had to expect a further dampener to be added to the already subdued economic momentum in Germany”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

KfW-ifo SME Barometer February 2020 (PDF, 120 KB, non-accessible)

"The signs point to further declining inflation: crude oil prices have fallen and economic momentum is only moderate, now with an additional damper from the coronavirus. We are thus heading for inflation rates of less than one percent in spring - unless virus-related disruptions on the supply side drive up prices in the short term. In this environment, the ECB should continue to provide very fa-vourable financing conditions, but should not relax them any further. Possible liquidity problems of companies due to the consequences of the virus should be addressed differently.”

“The unemployment rate has hardly changed thus far but the economic weakness is increasingly affecting the labour market. This is being felt to varying degrees in different economic sectors. While the number of employees in the manufacturing sector is falling slightly, it continues to rise in the service and construction sectors. The health care, real estate and information and communication sectors are showing the largest employment gains. On the other hand, employees in temporary employment are particularly affected by job cuts. At the end of 2019, there were around 80,000 fewer temporary workers than in the previous year. This represents a decline of 10%. Domestic consumption and construction investments will remain the pillars of the economy for the time being. This results from the good employment situation and noticeable wage increases. Real wages rose by an average of 2% in 2019.”

“Corporate lending in the euro area stabilized at the beginning of the year. Following the positive development of European consumer confidence and the purchasing managers index, this is another encouraging signal for the economy. However, the economic effects of the coronavirus are yet to be seen. Production stoppages due to the delay in deliveries from China may even temporarily lead to increased financing requirements to bridge liquidity bottlenecks. Reports of stronger growth in the credit market should therefore be treated with caution in the coming months.”

KfW Research therefore expects GDP to grow by only 0.8% in all of 2020 (previous forecast: +0.9%). In its initial forecast for 2021, KfW Research predicts a 1.3% increase in growth.

KfW Research bases its forecast on the assumption that the coronavirus epidemic will remain mostly confined to China and will abate in several weeks. After that, the Chinese economy should return to normal relatively quickly before any massive disruptions occur in global value chains. The downward risks of the novel virus are substantial, however. “Should the SARS-CoV-2 epidemic continue for longer and impact other regions of the world more heavily, it would raise the likelihood of serious consequences for international trade and value chains, to which German industry is particularly exposed. This is why I am concerned about the situation in Italy”, warned Dr Fritzi Köhler-Geib, Chief Economist of KfW. With a view to 2021, however, Köhler-Geib sees good reason for an economic recovery. “Global economic growth should be slightly higher again next year, giving our exports new impetus. German industry should then grow a bit more strongly again, as it will benefit from more favourable international demand. That will stimulate business investment. At the same time, the partial elimination of the solidarity surcharge from 2021 will strengthen consumers’ purchasing power.”

“The ifo business climate for February was eagerly awaited, as it offers a first impression of how strongly the corona virus is worrying German companies. So far, there have been reports from individual companies but there is hardly any reliable data on the effects on a broad scale. The focus is on the internationally intertwined manufacturing sector, which reported a marked improvement in sentiment in January and now surprisingly reports a renewed improvement in the business climate. Nevertheless, it is to be feared that German industry will be adversely affected if suppliers from China remain at a standstill for some time to come as a result of the corona virus. Experience shows that there is a catch-up movement after economic shocks such as the corona virus but this is probably not enough to compensate for the entire loss of growth within a year's time.”

“SMEs are increasingly withdrawing from innovation activity. That is a dangerous development for the sustainability and international competitiveness of the German economy. After all, innovation plays a major role for employment, growth and productivity. The decline in imitative innovations is also a problem. Innovations will not have economic impacts until technological progress is realised across the economy as a whole. We also need to further reinforce the development of new-to-market innovations and new technologies. Given the ambitious innovation strategies being pursued by other countries, Germany will have to step up its research efforts. German business cannot afford to rest on the laurels of being on the cutting edge of technology but must secure its pioneer role and develop technologies for the future.”

“The overall economic stagnation in the fourth quarter is already a small success, considering that industrial production alone shrank by 2.3%. With the hope of recovery, we must at least be patient until spring. At least for the first quarter, there are signs of a noticeable slowdown in the Chinese and thus also the global economy as a consequence of the corona virus. The extent to which this is also reflected in growth for the year as a whole depends on the severity and duration of the slump. The potential effect on the internationally highly interdependent German economy comes through two channels: on the one hand, because of the short-term drop in demand from China and, on the other hand, because of possible disruptions in the cross-border value chains.”

The Chief Economist of KfW, Dr Fritzi Köhler-Geib, commented on the findings of the survey as follows: “Although digitalisation has gathered momentum in the SME sector in the past years, one obstacle is becoming increasingly clearer. The digital skills of the workforce are lagging behind the developments. Further training is the most important strategy to solve this but is too often neglected for cost and time reasons. Digital learning formats have improved technically and didactically in the past years and can stimulate further training in Germany. E-learning enables people to learn at any time or place, making it particularly well suited for the needs of small businesses.”

“Considering the adverse global economic conditions, the euro area has still been holding up well in 2019. After all, the monetary union has grown twice as fast as Germany alone. However, even in the euro area growth was no more than meagre at the end of the year. Now the new coronavirus is adding to the strains. So far we assume that the consequences for Europe will remain limited and, as with previous infections, will only have a short-term negative impact on economic activity. Recently, there have also been growing signs that the industrial sector is stabilizing. Therefore, economic momentum should regain strength in the course of this year. However, the pace of growth will hardly be sufficient to drive inflation permanently towards the ECB's 2% target. Instead, the rate of inflation should gradually decline from the 1.4 percent reported today in the coming months.”

“The Brexiteers will have a splendid break-up party on Friday night, which will be as hard to bear for their almost as many pro-European compatriots as it is for me. I am convinced that 1 February 2020 is a memorable day for the people of Europe, no matter which side of the English Channel they are currently living on. Over the past three years, Brexit has already tied up a great deal of resources in the EU and its Member States that could otherwise have been put to far more productive use in tackling pressing economic, social and environmental challenges. This process is not yet over. In the forthcoming negotiations, it is important to develop not only fair competition rules but above all a framework for future relations between Europe and the UK that are as close as possible and at least minimise the long-term damage to both sides. Ideally, this could even become a model for other non-EU countries that, for various reasons, cannot or do not want to be members of the EU. In any case, in the future, Europe will only succeed in maintaining its global position on a par with the US and China if it stands together and pools its forces.”

“Most employees in Germany will still not need to worry about their jobs in 2020. However, the eco-nomic weakness will not leave the labour market unaffected: Unemployment has risen slightly since May last year, the number of cyclical short-time workers has risen to 50,000 and the number of people in employment is growing more slowly – despite the continuing shortage of skilled workers, especially among construction workers, geriatric nurses and IT specialists. A reversal of the weak labour market trend is not expected until the end of the year at the earliest. It is generally expected that the global economy and German exports will gradually recover over the course of the year. However, things could also turn out differently. Foreign trade risks remain the Achilles' heel of the otherwise successful German export industry.”

“Since last summer, the European corporate loan market has continuously lost momentum. I currently see the reasons for the slowdown mainly on the demand side. This is also supported by the latest ECB survey of European financial institutions, which reported a decline in demand for the first time since the end of 2013. In view of the cloudy economic outlook and political uncertainties, companies are increasingly holding back on investments and borrowing, despite still very good lending conditions. In addition, banks are also becoming somewhat more cautious. However, low margins and ample liquidity continue to provide strong incentives for expanding the volume of credit. In any case, the ECB is likely to use the noticeable cooling as an argument for continuing its low interest rate policy.”

“At the beginning of 2020, the mood in German companies is somewhat gloomier again. Although this came as a surprise, it was not entirely without reason. The partial agreement in the US-Chinese trade dispute and the orderly withdrawal of the UK from the EU merely eliminate the immediate downside risks, but they do not yet create any real stimulus for the economy. New rifts are likely to open up in the forthcoming negotiations on future UK-European relations, which will cause some uncertainty. In addition, an end to the industrial recession, which has already lasted one and a half years and is thus the longest since reunification, is only dimly visible, while construction and services are showing unexpected signs of fatigue at the beginning of the year. The economic stalemate continues!”

“The Fed has recently communicated very clearly that the current key rate level is appropriate and that there are high hurdles for taking further monetary action. Accordingly, the Fed will leave its target rate range unchanged next Wednesday against the backdrop of a solid economy and moderate inflation rates. As with the ECB, the Fed's attention is currently focused on the revision of its monetary policy strategy. Above all, I believe that an adjustment with regard to the price target is desirable: Measured against its preferred measure of inflation - the core price index for personal consumption expenditures - the Fed very rarely reached its target rate of 2 % after the financial crisis. And an even greater challenge is the quantification of the employment objective which is closely linked with the assessment of the inflation-neutral unemployment rate. The current phase of wait-and-see policy is an ideal environment to push these strategic issues forward.”

"Economic data is developing in the right direction. In particular, business expectations in the manufacturing industry have risen noticeably in view of the de-escalation in the trade dispute between the USA and China. Therefore, no further easing of monetary policy is required at present. However, we are still miles away from a tightening process. Consequently, the ECB’s press conference on Thursday will revolve around the announced revision of the central bank’s strategy. Christine Lagarde will not anticipate the possible outcomes of the working groups. But we think it is likely that the ECB's inflation target will eventually be made more flexible – especially as we can obviously live quite well with somewhat lower inflation rates. In this case, extreme monetary policy measures should occur less frequently in future.”

“The very long upswing came to a virtual standstill in 2019; with real growth of 0.6%, Germany fell considerably short of its potential. Solid domestic demand alone saved the economy from recession last year. By contrast, the difficult foreign trade environment meant permanent stress for German industry, which also has to cope with the necessary structural change towards environmentally friendly products and production processes. Although the foreign trade burdens are likely to ease in the course of 2020, they will not disappear. In addition, there are geopolitical risks arising from the US-Iran conflict that are difficult to calculate.

Demography, climate change and digitalisation will present Germany with epoch-making challenges in the 2020s that have now begun. The more resolutely and rapidly these are tackled, the better. Investments in the digital and physical infrastructure, innovation and education are the key to this. There is ample fiscal space, as the huge government surplus of 1.5% of GDP underlines.”

“Despite low interest rates, the weak economic momentum, the industrial recession and multiple political uncertainties have dampened the appetite for new loans – among both banks and businesses”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The forces on both sides of the credit market are currently pulling in the same direction and dragging down growth momentum. Nonetheless, thanks to the healthy balance sheets of German enterprises, banks should continue to be ready to bridge liquidity bottlenecks that may occur in the event of unexpected developments. Sharp increases in short-term lending thus remain within the realm of possibility. But in order for a trend reversal in the credit market to be sustainable, economic growth will have to pick up noticeably and the political disruptions that are making it hard for businesses to plan will have to at least decrease. That is unlikely to occur before the middle of next year”, added Köhler-Geib.

KfW Credit Market Outlook December 2019 (PDF, 102 KB, non-accessible)

Dr Friederike Köhler-Geib, KfW’s Chief Economist, sees further potential for development: “The German economy can no longer afford to neglect the potential of women – at all levels. We are facing a skills shortage and the working-age population will shrink. It is therefore highly desirable for more women to occupy the executive floors of SMEs. Not least, greater mobilisation of women can help to ease the more challenging situation of business succession in the future. Germany’s SMEs need more women in management.”

Zu "Chefinnen im Mittelstand: Anteil der Frauen in Führung steigt nur leicht" (PDF, 95 KB, non-accessible)

“It is much too early to give the all clear, the threat of recession is not yet over”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW, on KfW Research’s current economic forecast. “The German economy is and remains vulnerable to negative surprises. The main risk factors are a possible re-escalation of the US-Chinese trade conflict and the residual risk of a disorderly Brexit, but also Italy’s high government debt. What is positive, however, is that the scope of Germany’s fiscal policy enables any damage from recession to be contained.”

KfW Business Cycle Compass Germany November 2019 (PDF, 149 KB, non-accessible)

"Real interest rates are decisive for financing and investment decisions. These have been negative on the German capital market since 2016. This has also frequently been the case with the US dollar in the past. So negative real interest rates are not really new. Since early summer, however, nominal interest rates have now also slid below zero almost across the entire yield curve - for German government bonds and in the euro swap market. This is visible to everyone. Since structural factors are among the reasons, it is likely that this environment will accompany us for some time to come.

KfW is facing up to these realities by making it possible to pass on its favourable refinancing conditions even in this environment - so that it can continue to provide optimum funding.

The main reason for KfW's promotion is independent of interest rate levels. This is because KfW becomes active when the market does not produce sufficient results. Take the example of climate protection: a stable climate is a public good. The market does not reflect this. Interest rates for financing investments that make a positive contribution to climate protection are just as high as others without promotion. This is independent of whether capital market interest rates are quoted at 5%, 0% or -1%. Another example: reduced-interest loans for SMEs, which have a relatively poor chance of success in refinancing due to asymmetric information, also retain their justification in a negative interest rate environment. Or even cheap loans for innovators, who can always only collect part of the pensions of their innovations, remain sensible.

Conclusion: Development banks and development loans are also in demand in a negative interest rate environment!"

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