KfW Research: Sentiment among SMEs improves minimally

• KfW ifo Business Climate Index has risen slightly
• Index has moved up for the first time since April 2024
• But services are the only sector to report higher confidence

It is only a small ray of hope, but the mood among Germany’s SMEs brightened slightly at the start of the year. Business sentiment improved by a moderate 0.6 points in January on the previous month to now -21.4 balance points. That still puts the index well below the long-term average represented by the zero line. With the exception of the previous month of December, the only time the mood was worse was at the outbreak of the pandemic in the spring of 2020 and during the 2009 financial crisis. This, however, was the first upward movement of the index since April 2024.

These are the findings of the KfW-ifo SME Barometer. KfW evaluates the results of the ifo economic surveys by company size classes and main economic sectors.

The six-month expectations component of the business climate index rose minimally by 0.1 points to -23.6 balance points. So, pessimism still runs very deep against the backdrop of the unclear political situation in Germany and the looming trade conflict with the US. Assessments of the current situation improved by 1.2 points to -19.3 balance points, suggesting that the trend is bottoming out.

Positive impetus came only from SME service providers, whose sentiment improved noticeably in January. Other sectors, however, held a more negative view of the economy.

Service providers were a positive standout also among large enterprises. Overall, however, the business climate index for large enterprises dipped by 0.9 points to -28.0 points in January. Sentiment among large enterprises thus remained significantly worse than among SMEs. Although large enterprises viewed their current situation slightly more positively than in December, their expectations deteriorated sharply.

“We should be under no illusions. The slight improvement in sentiment among SMEs in January was only a drop in the ocean after what has now been a five-year stagnation across the broad economy and given the loss in international competitiveness”,

said Dr Klaus Borger, economic expert at KfW Research.

“This is all the more the case as the improvement is being driven almost exclusively by service providers, while the mood among large export-oriented industrial firms is increasingly worsening. A radical change for the better would require a level-headed monetary policy as well as, in particular, coherent responses from policymakers and enterprises to the great transformative challenges.”

The current KfW-ifo SME Barometer can be downloaded from: KfW-ifo SME Barometer | KfW

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