SMEs start the new year with a slightly furrowed brow, while large enterprises are perceptibly unsettled

• KfW-ifo SME Barometer notes a subdued start to the year for the globally networked German economy
• Scepticism about future business drags sentiment down
• Current business situation is still evaluated as very good

The fear of an increasingly protectionist world economy is unsettling Germany’s globally networked businesses. The business climate cooled off in January for both SMEs and large enterprises, as shown by the latest KfW-ifo SME Barometer. In the case of SMEs, the decline has been limited, falling by 0.4 points to 19.5 balance points, but in contrast there has been a significant drop in business confidence among large enterprises (-2.4 points to 16.9 balance points). In both company-size classes, however, the more sceptical view of future business is the sole driver of the downturn in sentiment: business expectations for small and medium-sized enterprises fell by 1.1 points to 9.5 balance points, while the expectations of large enterprises fell much more dramatically by 4.7 points to 5.6 balance points. The consistently very good evaluations of the current business situations stood slightly above the level of the previous month (SMEs: +0.3 points to 29.4 balance points; large-scale enterprises: +0.2 points to 28.4 balance points).

Above all, it was the major industrial and wholesale companies that reported a noticeable cooling off of the climate in January – in other words, those sections of the German economy that are particularly closely aligned with the international markets. However, the drop in sentiment extends beyond the export sectors: the climate in the retail trade is also negative. And even small and medium-sized construction companies, where residential construction is the main field of activity, have registered a noticeable decline in the climate following the record year of 2016. One reason for the recent slump in confidence among construction firms could be the moderate increase in the interest rates, which has made the financing of building projects somewhat more expensive.

“The failed start to the year shows how sensitively the German economy – which is heavily oriented towards exports – responds to possible new obstacles to trade. In light of the consistently positive assessments of the situation and the reliable domestic economy, however, I do not think that the upturn is in any immediate danger,” said Dr Jörg Zeuner, Chief Economist at KfW. He suggested that growth in the first quarter could reach a similarly positive level as in the closing quarter of 2016 – in each case, a rate of 0.5 % compared to the previous quarter was possible. “However, what will happen economically after that is becoming less and less clear. We do see increasing question marks hanging over the continuation of the stable and very solid upswing of the past three years at a time of US isolationism, Brexit, important elections in core Europe and ongoing geopolitical risks in the Middle East. In fact, Germany and its partner countries in Europe have it in their hands to respond to the challenges with a determined and joint approach that strengthens their economies.”

The current KfW-ifo SME Barometer can be downloaded at:

www.kfw.de/KfW-Group/Service/Download-Center/Research-(EN)/KfW-ifo-SME-Barometer-(EN)