KfW-ifo SME Barometer

• Growing optimism boosts business confidence
• Strong rise in sentiment in the manufacturing sector
• Employment expectations higher than they have been for a long time
• Widespread positive price expectations for the first time in three years

At the start of the final quarter 2016, there was no trace of autumn doldrums in the German economy. According to the KfW-ifo SME Barometer, business sentiment in the SME sector has risen by 2.3 points to 20.4 balance points – another increase on the back of the unusually strong increase in the previous month. The confident outlook of businesses is the main reason for this trend. SMEs’ business expectations are on the highest level since early 2014, with a noteworthy increase of 3.7 points to 13.8 balance points. Small and medium-sized enterprises’ satisfaction with their ongoing business also contributes to the good mood (+0.9 to 26.9 balance points).

The positive sentiment is carried by continuing lively domestic demand in Germany, sustained primarily by job growth, consumption and residential construction activity. What is more, the immediate Brexit shock appears to have been digested as some good news has come from the global economy. German exports rebounded after four consecutive monthly declines, growing by a strong 3.4% in August. Export orders probably increased tangibly in the third quarter, and the industrial firms surveyed by the Ifo Institute had more optimistic export expectations in October than they have had in the last three years.

Signs of global economic recovery lifted the mood among large enterprises in October as well. They became even more confident than SMEs, their sentiment rising by 3.2 points to 18.9 balance points, with large export heavyweights taking the lead (+3.8 points to 18.9 balance points). The business climate of manufacturing SMEs also improved strongly by 3.2 points, climbing to 15.8 balance points. “The broad and rapid sentiment improvement in industry, both in the SME sector and among large enterprises, is particularly good news as manufacturing sets the pace of the German economy”, said Dr Jörg Zeuner, Chief Economist of KfW Group.

Besides improved general situation assessments and business expectations, enterprises’ sales price and employment expectations also painted an optimistic picture of the future in October. On balance, the number of large enterprises planning to create jobs is back to the level of April 2012 (+2.4 points to 15.4 balance points), while the employment indicator among SMEs (+1.1 points to 12.9 balance points) is on a level that has not been higher since July 2011. In addition, it is the first time in almost three years that both SMEs (+2.2 points to 2.9 balance points) and large enterprises (+3.2 points to 1.6 balance points) anticipate rising prices at the same time.

“The KfW-ifo SME Barometer demonstrates that small, medium-sized and large enterprises all trust in the positive development of the German economy. Based on the broadly improved outlook in October I believe there may definitely be upward scope in our 1.8% economic growth forecast for 2016, which still remains valid. A positive surprise cannot be ruled out for 2017 either, for which we currently expect 1.3% growth”, commented KfW’ Chief Economist Zeuner. However, some caution is appropriate with a view to 2017 in particular. “Given the firms’ high expectations, the potential for disappointments from possible disruptions is also quite high. One predictable source of disruption is still the Brexit, which the UK government currently plans to initiate in March 2017.”

The latest KfW-ifo SME Barometer can be downloaded from: www.kfw.de/mittelstandsbarometer.