SMEs realistic at start of year

• Business climate stable thanks to improved situation
• Oil price and euro fail to boost expectations
• Tangible pick-up in sentiment at large enterprises

The latest KfW-ifo SME Barometer has put a damper on expectations of a swift acceleration in German economic activity, which is currently pointing upwards in many revised forecasts: stagnating at 12.5 balance points, the SME business climate in January is exactly where it was in December. This is solely thanks to the better evaluation of the current business situation (+1.4 to 21.4 balance points). By contrast, the anything but euphoric assessment of future trends (-1.5 to 3.2 balance points) prevented a third consecutive increase in the business climate, which is commonly seen as a reliable signal for a turnaround in economic activity.

Taken in isolation the decline in SME business expectations is not yet dramatic because the indicator has only ceded part of the sharp increase recorded earlier. However, the result shows that the recovery which was generally expected is not a foregone conclusion. "A low oil price and a favourable euro exchange rate might not be enough to further significantly increase consumption and investments of German households and enterprises. Instead there is a threat of a renewed increase in the current account surplus" fears Dr Jörg Zeuner, Chief Economist at KfW.

Large enterprises are somewhat more confident about the economy, however, and have a much brighter outlook moving into 2015. The business climate for these companies rose 1.7 points to 10.0 balance points. Large enterprises are more upbeat about their business situation (+1.9 to 18.5 balance points) and their business expectations (+1.4 to 1.3 balance points) than in December. The better sentiment is being driven above all by the strong export industry and wholesale sector, which are benefiting from the low euro exchange rate and the healthy US economy.

"The economy is gearing up for a recovery. But it is not a foregone conclusion that this will be a convincing success. The subdued January results in our survey – at least for SMEs, the so-called backbone of the economy – suggest the possibility that a not insignificant part of the growing disposable incomes and profits derived from low interest rates, a low euro rate and low oil prices could be saved" said Zeuner, summing up the situation. The depreciation of the euro, the decline in the price of oil and the still encouraging labour market all came as a boost. But these factors were countered by substantial risks: "Tensions with Russia are still high, negotiations with Greece will take time, and the decline in consumer prices since January – in Germany too – will possibly start to impact soon on the profit expectations of companies, reducing the scope for wage increases". All told, companies find themselves at a crossroads and are likely to think very carefully about whether they dare to invest. "It is therefore possible we will see somewhat more dynamic economic growth in 2015 than we have predicted so far, but no more than one and a half percent is anticipated", added Zeuner.

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