Business climate: SMEs confident about 2014

• Modest improvement in SMEs' assessments of the current situation and expectations
• Business climate for large enterprises nearly stable
• Retail sentiment at yearly high

German companies are confident heading into the New Year. At 19.8 balance sheet points (+0.4 points on November) the SME business climate finished the year 2013 at its highest level since February 2012. Both climate components, that is business situation and expectations, posted slight gains again:

• Assessments of the current business situation were up 0.3 points to 24.1 balance sheet points in December. This means they were 2.9 points higher on average for Q4 compared with Q3, and shows that economic activity did indeed pick up some pace in the closing quarter of the year.
• Business expectations rose somewhat more strongly, by 0.6 points to 15.3 balance sheet points. Looking at the quarter as a whole, they increased more than twice as fast as the current situation component, registering a figure of 6.0 points, thus underpinning hopes for economic activity in 2014. This does, however, increase the potential for disappointment.

Sentiment remains upbeat for large enterprises too: the business climate held steady on the previous month ( 0.1 point to 15.2 balance sheet points). Yet as has been more common recently, the current assessment of the business situation ( 1.0 point to 14.4 balance sheet points) is weaker than expected (+0.9 points to 15.6 balance sheet points). Large enterprises and SMEs concur regarding their views. The expectation indicators relevant for investment and employment decisions are on a par as 2014 gets underway. The main reason for this optimism is the growing global economy driven by industrialised countries, primarily the US. This is likely to please export-oriented sectors in particular.

Sentiment is changing differently in the main economic sectors. The business climate is slightly gloomier for industry and wholesalers, whereby only a small part of the previously robust gains have been ceded. In contrast, the climate in the retail trade, which is currently leading the sentiment rankings, posted some rather considerable gains (SMEs: +5.2 points to 20.0 balance sheet points; large enterprises: +3.4 points to 13.4 balance sheet points). This means that sentiment in retail was not only at a new yearly high at the end of 2013, but the previous year's figure from December 2012 was also easily exceeded in both size categories, up 11.0 and 6.6 points respectively. Retailers are clearly more than satisfied with this year's business over the festive season.

KfW Chief Economist Dr Jörg Zeuner commented on the current SME business climate: "Germany is ready for an upturn in activity, drawing courage in particular from the radical improvement in business expectations since the low in May last year. For 2014, which has just begun, we expect real growth of 2%. The recovery began during 2013, but initially remained sluggish. This year, it is likely to gain momentum and be more broadly based. Alongside consumer spending and residential construction, both exports and corporate investment have a brighter outlook too. A setback in the European stabilisation process is still the largest individual risk. While this is less likely now, it is still conceivable should key European banks find themselves in difficulty again, should new and severe doubts arise about the sustainability of public finances in individual Eurozone countries or should necessary reforms drag on in these states. Finally, the positive sentiment does come with the risk of setback if the expectations are not met in good time. Investment activity would then be the main area to suffer."

A detailed analysis including data tables and charts relating to the current KfW ifo SME Barometer can be found at www.kfw.de/mittelstandsbarometer.