Comments from Dr Köhler-Geib

“The fact that the digitalisation push triggered by the COVID-19 pandemic in the SME sector continues is good news. Given the great challenges the ongoing transformation to a digital economy and society poses for our country, further efforts are necessary. Various starting points are possible for stimulating digitalisation activities in the SME sector. They range from developing and improving the digital skills of the workforce through reducing funding barriers and giving greater attention to the strategic importance of digitalisation to expanding the country’s digital infrastructure. Only in this way can small and medium-sized enterprises unlock their full potential in the digital transformation and preserve and enhance their competitiveness.”

KfW SME Digitalisation Report 2023(PDF, 1 MB, accessible)

“At the April meeting of the ECB, the majority of Council members will probably vote for unchanged key interest rates. However, the significant progress made in the fight against inflation opens up scope for an early easing of monetary policy. I believe a reduction in the deposit rate by 25 basis points before the summer break is very likely, provided the data for the coming months underpins the trend back towards sustained price stability. In addition to a decline in wage growth, a noticeable slowdown in services inflation, which has been stuck at 4% since November, is particularly important. Services are so relevant for the development of inflation because they account for around 45% of the consumer basket. In recent months, these stubbornly high price increases have been offset by falling inflation for food and industrial goods. During this period, the inflation-dampening effect of falling energy prices has already weakened noticeably, and should be history by May at the latest. It could even happen sooner, as geopolitical tensions and a restrictive OPEC+ policy are currently pushing up the oil price.”

“At last, it looks as though the long-awaited economic spring is coming. After many months of excessively dismal business sentiment, March is showing clear signs of a turnaround. Given the considerable increases in real wages, household consumption in particular is becoming a driver of economic activity, improving the outlook for retailers and consumption-related services enterprises. To be sure, the activity indicators for the manufacturing sector are still predominantly negative, but the expected resurgence in demand from abroad and the prospects of more relaxed monetary policy give hope for improvement. The situation assessments and expectations of businesses are still on a very low level, but every sentiment upswing starts small.”

“We continue to approach the inflation target with small steps. The slowdown in consumer price inflation persists in March. However, the last mile remains an arduous affair. The fall in energy prices, which has had a strong dampening effect in recent months, is slowly crumbling away. At the same time, services are still becoming much more expensive. However, the sales price expectations of service providers have fallen recently and the pace of wage increases has also slowed somewhat. Only if these positive developments continue and are reflected in prices to a sufficient extent will the ECB consider the conditions for a first interest rate cut in the summer to be fulfilled.”

“The retreat of inflation continues. The falling food prices is providing welcome relief for consumers and, despite the current rise in oil prices, energy costs less overall than a year ago. However, the uncomfortably high service inflation rate of 3.7 % remains worrying. The early Easter this year is likely to have played a significant role in this. Package holidays in particular is likely to have become much more expensive in March due to the early Easter. The last few steps toward the inflation target could still be bumpy. In April, the end of the VAT reduction is likely to lead to a surge in gas and heating prices.”

"As the economy has slowed, the shortage of skilled labour has also eased somewhat. The number of registered vacancies has fallen by more than 70,000 to around 700,000 since last year. Nevertheless, a lack of skilled labour is hampering economic growth and delaying the climate-neutral and digital transformation. The extent of the shortage is reflected in the vacancy times for open positions. On average, it takes 170 days for a vacancy registered with the job centres to be filled – four times as long as 20 years ago. This is a historic high. IT professions are particularly affected. The demand for IT experts has been boosted by the promising advances in artificial intelligence. The shortage of IT specialists is hampering productivity progress, which is the source of economic growth. In order to curb the shortage, more young people in education, those in employment and job seekers must qualify for careers in information and communication technology and familiarise themselves with the application and development of new software and technologies."

"The Fed will most likely leave the key interest rate range unchanged at 5.25% to 5.50% at its March meeting. However, US Federal Reserve Chairman Jerome Powell is likely to hold out the prospect of an initial interest rate cut in the summer. However, he will not guarantee an easing of monetary policy. The Fed will make its decision dependent on the further development of the overall economic situation. The basic prerequisite for an interest rate cut is that the Fed is convinced of a sustained decline in the inflation rate towards the two per cent target. In February, inflation again moved more or less sideways. The coming data points must therefore increase confidence that price rises are really under control before starting to cut interest rates again."

“Securing our supply of raw materials requires us to take into account the entire value chain from extraction to the imported input. Making the supply of raw materials resilient incurs an initial cost, but ultimately it is a prerequisite for shaping the green and digital transformation. Supporting technical progress, for example to enable raw materials to be used more efficiently or substituted by also developing alternative processes, is a key cross-cutting measure that has relevance for all raw materials.”

Set in stone? The German economy’s dependency on copper, lithium and rare earths(PDF, 1 MB, accessible)

“The downward spiral of business sentiment practically came to a standstill in February, but sentiment among SMEs remained deep in the doldrums nonetheless. Thus, a wide gap remains between sentiment and the actual trend, since in the past it was only during deep recessions that we saw the low current level of business confidence. Although the economic outlook is generally modest, even the most pessimistic forecasts for 2024 are far away from such scenarios. Particularly in manufacturing, there are still hardly any signs of an economic turnaround. In the services sector, however, recent economic surveys at least reveal signs of a consumption-driven recovery, which we expect to set in this year. Household consumption grew again slightly in the past quarters already, and strong increases in real wages mean that there should be significantly more to come here, which is why we expect modest economic growth of +0.3% again this year. For 2025 we expect solid economic growth of 1.2% as a result of continuing robust growth in consumption and global monetary policy easing, which will begin already this year.”

KfW-ifo SME Barometer February 2024(PDF, 184 KB, accessible)

"The last mile on the way to the inflation target is the most difficult. The ECB is likely to leave key interest rates unchanged for the time being. There is now also growing consensus among market participants that a key interest rate cut in March or April is unlikely. The upcoming update of the macroeconomic projections is expected to contain only moderate downward revisions for growth and inflation this year. The prospect of weak but stable economic development in the eurozone will allow monetary authorities to take a calm approach to the decision to ease monetary policy. The progress already made in combating inflation is significant, but there is still a lack of clarity as to whether the slowdown in consumer price inflation is sustainable. The majority of ECB Governing Council members have repeatedly pointed this out. The lack of clear signals of easing wage growth and signs of persistent inflation in services continue to call for vigilance. Geopolitical upheavals also remain a risk for a possible resurgence of inflation. My expectation is that the ECB will take at least until July to make its first interest rate move. The subsequent interest rate cuts are then likely to be made in small steps and with pauses on the way down."

"With the decline in European inflation in February, the prospects remain good that the target of 2% can be reached in the second half of 2024. The downside potential is still particularly high for food, which is still significantly more expensive than in the previous year despite all the progress made. However, further improvement is in sight here due to lower costs for energy and intermediate products. However, there is still a risk of inflation for services becoming more entrenched. Although inflation in this sector fell for the first time in three months, it was only minimal. According to surveys, however, a fifth of European service companies still expect sales prices to rise again. As there have also been no clear signs of easing in wage growth so far, I continue to assume that the ECB will leave key interest rates unchanged into the summer."

"The rise in consumer prices is continuing to fall. The long disproportionate rise in food prices finally fell noticeably. Employees will benefit from this through a noticeable rise in real wages. This is important to help the sluggish economy back on its feet and boost consumption. I expect inflation to maintain its downward trajectory in the coming months, albeit at a much slower pace. While the favorable development on the gas and electricity markets is providing a tailwind, it remains to be seen how persistent the upward price trend in services will play out."

“The current weak economic development is falling short of expectations. In addition to economic factors, long-term structural developments are also at work, above all demographics and the associated shortage of skilled workers. Further countermeasures are urgently needed here, as the shrinking labor supply and falling working hours have halved the growth potential compared to the last decade. The baby boomers are now gradually retiring. This is also hampering the climate-neutral and digital transformation: the surveys in the KfW SME Panel show that the shortage of skilled workers is one of the biggest obstacles. We have to deal with this as a society, and we can do something about it. The following are suitable: higher labor force participation of all those who are already in Germany and qualified immigration, investments and innovations to increase productivity as well as educational initiatives to specifically eliminate skills shortages and educational deficits. Reducing bureaucracy also helps, as bureaucracy is one of the most frequently cited obstacles to innovation in SMEs.”

"The ifo Business Climate has recovered in February. With good reason, as we believe that the economic outlook is better than the still gloomy business expectations of companies. Rising real wages, an expected stable level of employment and a recovery in global trade are the silver lining on the horizon and should gradually boost the economy from the spring onwards. Although we only expect growth of 0.3% this year due to a rather meagre start to it, economic output is likely to expand by more than 1% again next year."

"After a brief interruption, inflation loses momentum again in January. The conditions for a further slowdown in consumer inflation over the course of the year are in place. In particular, the gloomy economic environment and the continuing fall in energy prices are likely to keep price increases in check. The target of 2% could therefore be reached again in the second half of 2024. However, in view of wage trends and new disruptions to supply chains in a fragile geopolitical environment, caution is still appropriate. This is also shown by the recent rise in sales price expectations of service companies. I therefore expect the ECB to take its time with interest rate cuts."

"As expected, inflation is falling at the start of the year. The economic weakness is currently limiting companies' scope for price increases. The expiry of supportive policy measures, including the end of the VAT reduction for restaurants and the energy price brakes, therefore only had a limited impact on consumer prices. In addition, significant base effects once again had a dampening effect on annual inflation in January. Together with the continuing fall in electricity and gas prices, these factors are pushing inflation a good deal closer to the 2% target."

“The labour market came through the economic downturn well in 2023. The number of people in employment rose by more than 300,000, while the number of unemployed increased by about 190,000. However, the increase is almost entirely due to job-seeking war refugees from Ukraine. The shortage of skilled workers and reducing long-term unemployment remain major challenges for 2024. According to the KfW-ifo Skilled Labour Barometer, the shortage of skilled workers has decreased in the past year due to the economic situation. In the 4th quarter, however, 39% of companies still felt that their business activities were hampered by a lack of skilled workers and this proportion will rise again over the course of the year if the economy recovers. Long-term unemployment is particularly high in the structurally weak regions of the new federal states and in the Ruhr area. In the last five years, no sustained success has been achieved in reducing this figure. There are currently around 900,000 long-term unemployed. Education and training, the creation of local jobs and the promotion of occupational and regional mobility help to reduce long-term unemployment. Together, this helps to minimise the fears of decline and the future among those affected.”

"The GDP in the eurozone stagnates in the fourth quarter. The GDP flash estimate of the German Federal Statistical Office for the quarterly growth rate in Germany already indicated a contraction of the largest economy in the euro area for the winter quarter. For the eurozone came it now better than expected, but weak numbers of the industry production and the construction sector strain economic growth. The hoped-for consumption engine lacks yet the steam. Thereby the signs for rising consumption expenses are good with the drop of inflation und wage increases such that the private consumption may soon support the euro area economy. Therefore, I expect a moderate economic recovery in 2024. For the whole year we project a growth of around three-quarter percent.”

"The Fed will probably leave the key interest rate unchanged at its first meeting of the year. However, speculation as to when the first rate cut will take place is already in full swing. The market seems to be slowly bidding farewell to its interest rate cut dreams for the spring and I still do not expect an easing until the summer. The US monetary authorities want to be absolutely certain that inflation is on a sustainable path towards the two per cent target and that the labour market has returned to equilibrium. While few surprises are therefore to be expected in the interest rate decision, there will be discussions about the further balance sheet reduction in the Fed's Open Market Committee. However, I believe it is quite possible that the key interest rate will be lowered over the course of the year and that the balance sheet reduction will nevertheless continue as before.”

“The economic start to the new year was a disappointment, at least in terms of sentiment: As in the previous month, the business climate continued to decline in January. Nevertheless, with inflationary pressure easing and real wages rising, key negative factors should ease over the course of this year and a recovery driven primarily by consumption should set in. I expect growth of around half a per cent in 2024.”

"Key interest rates will remain where they are. This applies to the upcoming monetary policy decision this week, but contrary to market expectations, probably also for the coming months. I am currently assuming that the ECB will wait for the summer and further reliable data on wage trends. There is widespread agreement among the Council members that clarity on wage growth is an essential prerequisite for the start of monetary easing. I share this view, as this can reduce the risk of inflation flaring up again. After all, the recent fall in inflation expectations among European consumers is a positive signal for the upcoming wage negotiations."

"According to the first official estimate, the German economy shrank by 0.3% last year. This primarily reflects the impact of the global tightening of monetary policy and the consequences of the energy crisis with a loss of purchasing power and an increase in costs for energy-intensive industries. However, we see a silver lining for the economy in 2024. Thanks to strong real wage growth, private consumption in particular is likely to pick up again. Together with an expected recovery in export demand, gross domestic product is likely to grow by around half a per cent. Inflation is expected to return to an annual average of around 2 per cent. This means that the landing after the period of high inflation will probably be quite soft in Germany too."

"Inflation ends the year with the expected jump upwards. The accelerated rise in consumer prices is mainly a result of the waning inflation-dampening effect of lower energy prices. In December, this was further reinforced by the introduction of the German price brakes a year ago. The 2% target is now a good deal further away again. The downward trend in inflation remains intact, as shown by the falling core rate and the minor price increases at the upstream economic stages. Nevertheless, the rise shows that rapid cuts in key interest rates would come too soon."

"German inflation is currently on a rollercoaster. After recent significant declines, consumer prices rose sharply again in December. In view of the turbulent ups and downs, calmness is now required and appropriate. The main reason for the rise in inflation lies in the past. A year ago, the first stage of the price brake suspended advance payments for gas and heating. The associated base effect makes today's energy prices appear higher in comparison, even though they have fallen further in recent months. At the same time, the core rate is continuing to fall. This signals that price pressure is continuing to ease across the board and points to an intact downward trend in inflation."

“The prospects for economic growth offer little cause for euphoria at the turn of the year. However, the labour market should continue to prove to be a rock in the surf. This is because real wages are likely to rise significantly in view of the collective wage agreements that will boost purchasing power and the shortage of skilled workers means that companies will probably continue to endeavour to retain scarce workers. I expect the number of people in employment to rise by 100,000 to 46.1 million in 2024. That would be the highest level in the history of the Federal Republic of Germany. From 2025, the labour force will most likely begin to shrink due to demographic trends. The average number of unemployed people in 2024 is likely to be slightly higher than last year at around 2.6 million. The German economic steamship, which groaned and dragged itself through the heavy seas last year, is expected to slowly pick up speed again over the course of the year. This will also mean that the shortage of skilled labour will become more widespread again. Companies and administrations must prepare for this. This requires increased training and further education, as well as innovations and investments to increase productivity. It is very important that Germany keeps up with the AI competition, as this could lead to productivity boosts.”

“The share of businesses that saw their operations impaired by skills shortages fell below the 40% mark again for the first time in two years as a result of the economic downturn. But if the economy recovers as predicted next year, it will increase again. After all, the structural trend is continuing. More and more baby boomers are retiring, and smaller cohorts of young workers are entering the labour market. The number of employable people will begin to shrink in 2025 and usher in a new phase of skills shortages. The reduced supply of labour can limit economic growth to well below 1% in the longer term. However, the private sector, the state and people of working age have it in their hands to change this. What is required are decisive and rapid responses that pull out all the stops. We need to increase the labour market participation of female and older workers and skilled migration from countries outside the EU. In addition, the private and public sector must increase labour productivity more strongly in order to substitute missing workers with digitalisation and automation.”

“At the end of a difficult year for the economy, the hoped-for fourth consecutive improvement in sentiment has failed to materialise. The business climate is falling again, signalling that the trees will hardly grow into the sky in 2024 either. I expect a return to moderate real growth of around half a per cent in the coming year, primarily thanks to a recovery in private consumption. This will be supported by stable employment, rising nominal wages and a significant decline in inflation.”

“Monetary policy now needs a steady hand. Inflation data in the eurozone has recently surprised on the upside. This has triggered speculation on the markets about rapid interest rate cuts. I stand by my assessment that the ECB will not make its first interest rate cut until summer 2024. At 3.6%, the core rate is still well above the inflation target and the rise in consumer prices will accelerate again as early as December. Base effects in the energy sector and the expiry of political relief measures are contributing to this. For example, 19% VAT will once again be payable in the catering sector in Germany from January. In addition, further data points are needed to be able to reliably assess the extent to which the significant wage increases will affect consumer price trends.”

"At its last meeting of the year, the Federal Open Market Committee (FOMC) will most likely leave the key interest rate at the current range of 5.25 to 5.50 %. Price pressure is easing in almost all areas of the economy, causing the core inflation rate to fall to 4.0% in October, its lowest level since September 2021. The Federal Reserve's assessment of the situation for 2024 will emerge from the publication of the new projections. Growth expectations are likely to be revised slightly upwards and inflation forecasts slightly downwards. It is therefore very likely that the Fed will come down next year from the 22-year high of the key interest rate. However, the FOMC members' medium-term estimates for inflation and growth were widely dispersed, reflecting the high forecasting uncertainty at the moment. As things stand today, the big question is when the descent from the interest rate plateau will begin and how quickly it will take place. The Fed members' new interest rate forecasts will also provide a clue here. I expect an initial interest rate cut from the summer of next year.”

"The global investments in climate protection must increase annually by at least 30 percent – about three times faster than before. Development and promotional banks can help reduce significant barriers to private climate financing by reducing complex risk profiles, supporting high initial investments, and providing long-term capital while addressing knowledge gaps."

The Climate Financing Roadmap(PDF, 9 MB, non-accessible)

"Amid the series of weak economic data, the European inflation figures provide a bright spot. The rise in consumer prices continues to ease. However, it would be far too early to consider cutting key interest rates. This is shown by the core rate, which is still clearly too high. Over the next few months, the current strong inflation-dampening effects of lower energy prices will quickly disappear. As early as December, the overall rate is likely to return to a 3 before the decimal point. Persistence is therefore the order of the day for the ECB. I expect Christine Lagarde to communicate this clearly on the occasion of the upcoming interest rate decision."

“The stagnation of the German economy in recent quarters is having a greater impact on the labour market in winter. The seasonally adjusted number of unemployed persons has risen further in recent months to 2.6 million. However, growth has so far remained moderate compared to previous economic lows. This shows that the shortage of skilled workers continues to have a grip on the labour market despite the economic downturn. At 733,000, the number of job vacancies in November was one of the highest in the last 20 years. The average time it took to fill a vacancy in the first nine months was 150 days. This means that the time taken to fill a vacancy has risen to a new high compared to the previous year. Securing skilled labour and boosting productivity must be given higher priority so that the German economy can remain on a growth path that keeps the scope for distribution open. This is the only way to realise the necessary investments in the climate-neutral and digital transformation. Because in the end, it is people who realise the transformation.”

"Inflation falls a little further in November. This was helped by the oil price, which has recently fallen again despite the ongoing conflict in the Middle East. This is reflected positively in consumers' fuel costs and heating oil purchases. I expect inflation to continue to ease towards the 2% target over the course of next year. However, the rise in consumer prices is likely to accelerate again around the turn of the year. On the one hand, this is due to the suspension of advance payments for gas and heating last year, which will have a strong, negative base effect on energy this year. Added to this is the significant increase in the truck toll from December and the end of the VAT reduction for the catering industry in January. However, consumers are likely to feel the effects of both in the form of only partially higher prices."

The ifo Business Climate Index has risen slightly in November and an improvement in the Purchasing Managers' Index was also reported yesterday. This gives us hope for the coming year, in which we expect a moderate economic recovery primarily based on private consumption. After all, wage growth will finally be well above the inflation rate again next year and employment is expected to remain stable. In our economic projections published today, we forecast economic growth of 0.6% for 2024.

“SME business sentiment turned the corner in October. This reinforces the impression that the economy is finally emerging from its trough. For now, however, it is mostly the expectations that are recovering. It therefore remains uncertain whether the minimal contraction of Germany's economic output in the third quarter will be followed by growth already in the current fourth quarter. But there is good reason to hope for an economic recovery next year on the back of household consumption, which rising real wages will boost sooner or later. As most European trading partners are likely to develop in a similar manner and global consumption will probably shift more towards merchandise again after the post-pandemic services boom, the conditions are there for renewed external demand as well as demand for industrial goods.”

"The robust labour market is supporting the economy and this is likely to remain the case in the coming year. The shortage of skilled workers is preventing a sharp rise in unemployment and if real incomes rise again at the end of the year as expected, this will set the course for the economic recovery next year. For the full year 2023, I expect the number of employed people to increase by 320,000 to 45.9 million compared to 2022. The unemployment rate is expected to rise from 5.3% in 2022 to 5.6% this year. This means that there will be 2.6 million unemployed people, around 200,000 more than last year. I expect the number of employed people to increase by another 100,000 next year. The increase is significantly weaker than in 2023. The reason for this is a further shortage of work supply. The unemployment rate in 2024 is likely to be about the same as in 2023. The shortage of skilled workers will increase again and limit growth prospects more in the future, unless the potential to secure skilled workers and increase productivity can be mobilised significantly more."

"The rapid decline in the inflation rate primarily reflects the easing on the energy markets since last summer. Even though consumer price inflation is now just below 3% it is still too early to sound the all-clear. Core inflation, which excludes energy and food prices, is only slowly on the way down. To prevent inflation from becoming entrenched above the 2% target, it is particularly important that companies only partially pass on higher wage costs to consumers. This will require a monetary policy that keeps the reins tight for some time to come. The Middle East conflict has also increased the upside risks to inflation. So far, however, the effects on energy prices have been too small to jeopardize the downward trend in European inflation."

"Price developments continue to provide good news in October. As expected, German consumer price inflation eases a good deal further. Inflation falls below 4% for the first time since the summer of 2021. Strong base effects provided support one last time. Exactly one year ago, consumer energy prices reached their temporary peak. This tailwind will weaken in the coming months and even reverse at times with the introduction of price brakes last December. We will therefore see a significant rise in the inflation rate again at the turn of the year. Nevertheless, the direction is right. Producer prices for industrial and agricultural products are rising only weakly or even falling year-on-year. However, in view of the geopolitical situation, there is an increased probability of new supply-side shocks. If these fail to materialize, it will depend above all on the services sector how quickly a return to price level stability is achieved. Stronger wage growth is putting cost pressures on this sector of the economy in particular."

"German economic output has now officially declined in the summer quarter. This reinforces the picture that economic activity will decline slightly in the year as a whole. The adaptability of German companies, collective energy saving and government crisis management prevented worse. Next year, thanks to declining inflation and rising incomes, the economy is likely to pick up again, primarily as a result of rising consumption."

"In its penultimate meeting this year, the Fed is expected to leave the key interest rate at the current range of 5.25 to 5.50%. This is because core inflation is on a good path and fell for the sixth time in a row in September. In addition, the recent sharp rise in long-term capital market rates is taking some of the work out of the Fed's fight against inflation. The yield on ten-year US government bonds has risen to over 5% for the first time since the financial crisis and the rise in interest rates is also increasingly reaching the real economy. For example, in the housing market, where the interest rate on 30-year US mortgages is now close to 8%, its highest level since 2000. Despite all this, the Fed will probably have to leave the key interest rate at the current level for some time. After all, the GDP figures just published for the third quarter underline that the good economic situation will keep price pressure even higher. Moreover, with the terror in Israel, in addition to the immeasurable human suffering of the people in the region, a new upside risk to inflation has been added from an economic perspective via possible effects on the oil market."

“The increase in the ifo business climate confirms the impression that the cyclical low point has finally been passed. Reasonable hopes for the economy are based above all on private consumption, because real wages, which are rising again, will sooner or later boost the largest expenditure component of the gross domestic product. Besides the immeasurable human suffering, however, the violence that has flared up in the Middle East means a new risk to the economy.”

“After ten interest rate hikes I expect the ECB to leave the deposit rate at 4% at the upcoming Council meeting. Inflation is falling in line with expectations and the impact of monetary policy on the economy is becoming increasingly visible. Bank lending to households and businesses continues to cool and monetary aggregates are shrinking. In addition, since the last interest rate decision in September, long-term bond yields have risen markedly, bringing with them an additional tightening of financing conditions. Thus, the level of key interest rates appears sufficiently restrictive at this point in time to bring about a return to price level stability. However, upside risks to inflation persist and have increased as a result of the terrible events in the Middle East. I do not expect monetary policy easing until the second half of next year at the earliest. In addition to the interest rate decision, the ECB meeting is also likely to focus on discussions of options for reducing excess liquidity. On the table are a possible increase in the minimum reserve ratio and an early end to the reinvestment of redemption amounts from the PEPP pandemic bond purchase program. While a decision on the reserve ratio is likely to be postponed and integrated into the ongoing review of the operational monetary policy framework, Council members could already decide now to accelerate balance sheet reduction from January 2024.”

"Since 2020, overlapping crises have put the resilience of Germany’s SMEs through a gruelling test. Nonetheless, despite all the stress factors such as the war in Ukraine, the energy crisis and rising prices, the bruises sustained by small and medium-sized enterprises have remained manageable even in 2022. This year, however, economic headwinds are putting increased strain on businesses. They are now rather sceptical about their business prospects. And even though the credit channel remains open, it is becoming more difficult for them to negotiate loans.

Despite the difficult economic environment, SMEs considerably expanded their investment activity in the past year, showing themselves to be a cornerstone of all economic activity. More than four in ten euros invested came from a small or medium-sized enterprise in 2022. Investment activity in manufacturing also developed more positively than many had expected.”

“The KfW-ifo SME Barometer for September paints a mixed picture with opposing sentiment trends in the main economic sectors and company size classes. Among SMEs, the slight improvement in expectations was coupled with a renewed deterioration in situation assessments. Such ambiguous indicator constellations can often be observed at the early stages of economic turning points and could be a sign that the economy has now bottomed out. A significant portion of the current burdens for businesses is of a temporary nature, and the outlook is better than the very subdued sentiment currently suggests. Noticeable wage increases, an employment level that appears to be nearly steady and the recent easing of the inflation rate should give new impetus to consumption in autumn and winter. After that, a relaxing of monetary policy may then begin around the globe in the later part of 2024. This is likely to be of particular benefit to Germany as a producer of capital goods. Their sales rise when interest rates fall. Now that a moderate contraction in the current year must be deemed an absolute certainty, I expect the German economy to gradually work its way out of the economic trough in the next quarters and grow by 0.8% in 2024.”

"The decline in the inflation rate is accelerating again at onset of fall. This is likely to continue in October, pushing overall inflation close to 3%. However, the low-hanging fruit gained from the easing on the energy markets will then have been harvested. The reduction in consumer price inflation will not be successful until domestic price pressures have also subsided on a sustained basis. Easing monetary policy too early would be counterproductive and increase the risk of a second wave of inflation. Accordingly, my expectation is that the ECB will leave key rates at the level reached for a longer period.”

“For three quarters now, the German economy has been plagued by an unpleasant combination of excessively high inflation and weak economic activity. Despite the sluggishness, the number of people in work has continued to rise year-on-year. Except for agriculture and forestry, employers in all sectors of the economy have increased employment since last year, even in the crisis-hit construction industry. This is in response to an increasingly tight labour supply. Demographic trends have further thinned the supply of skilled workers. The number of people of prime working age will fall by around 630,000 in 2023 without immigration. At the same time, the number of people reaching retirement age will increase by more than 350,000.This trend will continue at a slightly higher rate in 2024. If the German economy is to regain its full strength in the coming years, if prosperity is to be secured and if the climate-neutral and digital transformation is to be successfully advanced, the shortage of skilled workers will have to be curbed even more decisively. More skilled immigration is important, but far more is needed. In the competition for skilled workers, relying on shorter working hours would be a mistake for the economy as a whole. On the contrary, Germany needs greater labor force participation and higher increases in labour productivity. Without higher labour force participation, the number of people in work would already decline significantly.”

"As expected, German inflation fell sharply in September. After 18 months, the increase in consumer prices was again a 4 before the decimal point. This is mainly due to base effects, as in September last year the abolition of the 9-euro ticket and the gasoline discount led to a price jump in addition to the energy price increases. The abrupt drop in inflation is an important signal for the success of the fight against inflation. This can help to continually weaken price increases in the coming months as consumers and companies adjust their inflation expectations downward under the impression of the positive news."

“The ifo business climate is stagnating at a low level, yet the outlook for the German economy is better than the gloomy mood. Noticeably rising wages, more or less stable employment and the declining inflation rate should give new impetus to consumption in the foreseeable future. In addition, global monetary easing could begin in the course of 2024, from which Germany, as a producer of capital goods, can benefit. A significant part of the current burdens is cyclical in nature, but overcoming structural challenges such as demographic ageing and the energy transition still calls for the highest priority.”

“Following the mild technical recession in the past winter half-year and stagnation in the spring quarter, the German economy has been treading water for quite some time now, with business sentiment remaining in the doldrums for a further month – the fourth consecutive one. But there is reason for cautious hope. Noticeable wage increases, an employment level that appears to be nearly steady in light of the skills shortages and falling inflation will likely give new impetus to consumption going forward while mitigating the dampening effects of increased financing costs. For manufacturers, on the other hand, the situation remains difficult, although they still have a strong volume of orders in their books. Overall, the economy will likely need to take baby steps to work its way out of the broad economic trough. After the unfavourable start to the year, I expect German GDP to contract by 0.4% across 2023 as a whole despite the consumption-driven stabilisation expected for the coming months. It is unlikely to expand again before 2024, with the new summer forecast of KfW Research predicting moderate growth of 0.8%.”

"US Federal Reserve Chairman Jerome Powell has been talking for months about three aspects that make up the Fed's tightening cycle. The speed of the rate hikes, the final level of the interest rate and the period over which the rate must be kept in the restrictive range. Given the good development of the core inflation rate and the cooling of the previously clearly overheated labour market, I assume that the interest rate peak has already been reached and that there will be no further rate hike at the September meeting. From now on, it will be more about the question of how long the key interest rate will remain at the current level of 5.25 to 5.50%. I expect that the sharp rise in interest costs will have an even greater impact on the economy in the coming quarters and that the Fed will therefore start to lower interest rates slightly again in the summer of 2024.”

"The interest rate cycle is drawing to a close. Nevertheless, at the first ECB Council meeting after the summer break, the pendulum could well swing in favor of a final rate hike of 25 basis points. The multiple voices of the ECB representatives show that the decision is still open. This is primarily due to the ambiguous data picture, in which good arguments can be found both against and in favor of an interest rate pause. The rapid deterioration in economic sentiment and significant cooling of credit markets have to be weighed against a recent disappointing inflation performance and upward trends in long-term inflation expectations. A lot of attention will therefore be paid to the ECB staff's updated inflation forecasts in the debate among monetary watchdogs. My money is on a tenth rate hike, but it will be a tight race.”

„Amid the economic slowdown and gloomy mood, the robust labour market offers a ray of hope. The number of people in employment has continued to rise since the beginning of the year despite the stagnation of the economy. The unemployment rate has remained almost stable so far, even though the current rise in unemployment shows that the economic slowdown is leaving its mark on the labour market. The high resilience of the labour market has limited income losses among employees and prevented a sharper decline in private consumption and housing construction. For the second half of the year, there is reasonable hope that the economy will pick up again, albeit cautiously at first. Significant wage increases combined with a further slowdown in inflation should boost real incomes again by the end of the year. Private consumption can thus once again prove to be a pillar of the economy. Nevertheless, there is a need for action on the labour market. One thing above all is needed to further reduce unemployment: qualification. Nationwide, there are 1.7 million job vacancies compared to about 4 million people receiving basic benefits for jobseekers. In purely numerical terms, we thus still have a labour surplus in Germany. However, job seekers often lack the necessary qualifications. The value of vocational training becomes clear when comparing unemployment rates by qualification: In the Mansfeld-Südharz district, the unemployment rate for employees without a vocational qualification is the highest among all districts at 46%. For employees who have completed vocational training, the unemployment rate there is much lower at around 6%. And the situation is similar in Stendal, the Uckermark, the Kyffhäuserkreis and other structurally weak regions.”

"The publication of European consumer price inflation marks the start of the countdown to the first ECB interest rate decision after the summer break. With regard to the inflation reported today, it remains largely open whether there will be another interest rate step. Clear signals for the central bankers' decision-making are missing, the data picture is mixed. On the one hand, the flow of credit to the private sector is becoming increasingly narrow, with the result that the broad monetary aggregate M3 is now also shrinking. And the rapid deterioration in key sentiment indicators points to renewed recession risks. On the other hand, inflation is still well above target, while at the same time the upward trend in long-term inflation expectations on the financial markets is continuing. I tend to believe that the ECB will increase the key rate by 25 basis points in September, but it will be a close call."

"The fight against inflation requires tenacity. German consumers are facing a tough test of patience. Annual inflation has been well above the targeted two percent for more than 2 years, eating away at purchasing power. But the tide is slowly turning. Strong wage increases are putting more money in people's wallets, and in September a substantial decline in consumer price inflation can finally be expected when the previous year's relief packages are removed from the basis of comparison. That should lend support to the limping economy. But there is also a downside to rapidly rising wages. Due to the higher costs for companies, it is likely to take a little longer to reach the 2% inflation target again. I currently expect the inflation rate to still be 2.5% in 2024.”

“The economic outlook for the German economy is better than the current mood. The data on wage developments reported today confirm the assessment that private consumption should sustain a moderate economic recovery. The gap between inflation and nominal wage growth is visibly closing. A more significant increase in real wages can be expected at the end of the year. Driven by high price increases and the shortage of skilled workers, employees will receive the highest nominal wage increases in 30 years in the current year. On average, collectively agreed wages are expected to rise by more than 5% in 2023. A smaller increase is expected for next year. However, at around 2.5% (HICP), inflation in 2024 is likely to be much lower than in the current year, for which I expect average inflation of 6.3%. Subdued aggregate demand limits the scope for further price increases, and prices for both energy and food have already stabilised since the winter. If this development continues, real wages will rise noticeably again next year. This also gives rise to cautious optimism for the economy. In 2024, German GDP should therefore grow again after a decline of 0.4% this year, albeit only moderately at 0.8%.”

“Germany's economy has been treading water for some time now and the business climate is disappointing once again. Nevertheless, I am counting on a revival of consumption in the second half of the year, which is now benefiting from noticeably rising wages and easing inflationary pressure, after the slump last winter. For industry, on the other hand, the situation remains difficult with globally sluggish demand, although it still has a very decent order backlog. All in all, the economy will probably only be able to work its way out of the broad cyclical trough in a gradual step-by-step fashion. According to our summer forecast published today, we expect that annual average GDP will decline by 0.4% in 2023 and grow by 0.8% in 2024.”

“The labour market was largely resistant to the economic slowdown until the beginning of the summer. The number of employed persons in July exceeded the level of the same month last year by 147,000. In addition, there were 772,000 job vacancies. This was one of the highest levels in the last 30 years, despite the economic slowdown. The labour market thus continues to be strongly characterised by a shortage of skilled workers. The sectors of the economy that are seeing the strongest growth in employment include health and social work, information and communication, public administration and education and teaching. Labour demand in these sectors is much more influenced by long-term demand trends than by cyclical developments. At 45.9 million, the average number of people in employment in 2023 is expected to exceed the previous year's level by 330,000. The unemployment rate is expected to rise from 5.3% in 2022 to 5.6% in 2023. The outlook for 2024 remains very uncertain due to the Ukraine war and the possibility of continued high inflation. In the next years, the shortage of skilled workers will enter a critical phase. The cohorts retiring by 2030 are among the most heavily populated, while those entering the labour market are thinning out. In order to contain the consequences for the labour market, all actors need to take even more decisive countermeasures than before.”

“Inflation in the euro area remains on the retreat. At present, this is still primarily due to easing energy prices, unwinding supply bottlenecks and weak global demand for industrial goods. The ECB's role now is to give inflation the final push so that it really does fall back to the 2% target quickly. Whether it has already done enough to do so is still difficult to say due to the slow impact of monetary policy on prices and many other unknowns. But the Bank Lending Survey has just re-emphasized that policy rate hikes are already significantly stifling credit demand and, by extension, aggregate demand. If the weakness of the economic indicators continues in August, there is a growing probability that the ECB will pause with further interest rate steps in September.”

“The cautious optimism of spring that the German economy could pick up some speed again after the technical recession of the winter half of 2022/2023 has vanished. According to a Federal Statistical Office first release, GDP stagnated in the second quarter. The economic stalemate continues for the time being. The business cycle is stuck in the middle of the year in an economic no man’s land between a weak recession and a feeble recovery. Manufacturing was most disappointing thus far, since production remains stuck in a rut despite easing supply chain problems. The continuing above-average order volumes are set to provide at least some stability in the manufacturing sector over the coming months as well. Positive impetus could come from consumption, which ended its downward slide in the second quarter. In the months ahead, household purchasing power will be bolstered by easing inflationary pressure, an employment level that will likely remain almost steady, and noticeable wage increases. All in all, however, the coming quarters will at best see small steps towards an economic recovery. For 2023 as a whole, a positive growth rate is now beyond reach.”

KfW-ifo SME Barometer July 2023(PDF, 151 KB, accessible)

“The German economy is currently in a kind of limbo: Apparently, the increase in value added in the service sectors has outweighed the contraction in the manufacturing sector, so that in its first estimate the Federal Statistical Office assumes that gross domestic product will stagnate in the second quarter. The main cause for concern is the industrial sector, where production continues to tread water despite dwindling supply chain problems and order receipts are on a downward trend. As a major producer of capital goods, Germany is facing a particularly fierce headwind from global monetary tightening, and in energy-intensive industries price competitiveness remains a serious challenge. However, in view of high nominal wage increases coupled with easing inflationary pressure, a recovery in private consumption could stimulate the economy.”

"Inflation is resuming its downward trend after a brief pause, but for the time being the much too high inflation rate is only falling at an agonizingly leisurely pace. A significant slowdown in the annual rise in consumer prices is not expected until September. Then the relief packages of the past summer will drop out of the basis for comparison. Stagnating producer prices and declining import prices show that price pressure at the upstream economic stages is continuing to ease. In addition, the strengthening economic weakness is narrowing companies' scope for price increases. However, there are still risks of inflation becoming entrenched at too high a level. These include a possible new surge in food prices. Droughts and the end of the wheat agreement between Russia and Ukraine have increased the likelihood."

"The US economy grew by 2.4% on an annualised basis in the second quarter. The US economy is proving resilient despite the Federal Reserve's aggressive turnaround on interest rates. Stable consumer spending and nonresidential fixed investment had a positive impact. However, I continue to expect rising interest costs to slow economic activity in the second half of the year. Sentiment in the manufacturing sector has already deteriorated noticeably and the labour market, which has been clearly overheated lately, seems to be slowly cooling down somewhat. Workers will feel the impact, which will weigh on consumer spending in the coming months. However, on Wednesday, in parallel with the expected interest rate hike of a further 25 basis points, the U.S. Federal Reserve changed its assessment of current U.S. growth from "modest" to "moderate". The Fed now probably assumes that it only needs an economic dip – and not a recession – to push inflation further toward the two-percent target. This means that the US economy could come out of this interest rate cycle with a black eye.”

“The German economy is currently in an economic no man's land between a weak recession and an anaemic recovery. Those who had counted on a rebound in the business climate in July after the two previous slumps were disillusioned. Companies' view of the future is marked by a great deal of scepticism. So far, industry in particular has been disappointing, as production continues to tread water despite dwindling supply chain problems. In contrast, positive impulses could come from consumption, which is benefiting from rising wages and easing inflationary pressure. All in all, however, the best that can be achieved for the time being is small steps towards economic recovery.”

"Based on the statements of the ECB Council members, this week's interest rate decision can be considered a mere formality. The European central bank will hike the key interest rates by 25 basis points. Whether interest rates will continue to rise beyond that in September remains to be seen. My expectation is that Christine Lagarde will avoid specifying the coming interest rate path when explaining the monetary policy decisions. After the marked tightening in monetary policy, we are now entering a terrain where the risks of the central bank overshooting or undershooting need to be carefully weighed. This is a difficult task for the ECB, given the lagged and uncertain magnitude of the effect of interest rate hikes on consumer prices. In addition, there are large differences among euro area countries in terms of inflation. In some countries, inflation has already fallen back below the 2 percent target, while in the Baltic region, inflation is only slightly below 10 percent. The decisive factor will be how the data situation develops between now and the fall. In addition to new growth and inflation figures, the ECB will also focus on the development of the credit markets and inflation expectations."

"After the Fed paused at its last meeting after ten interest rate hikes in a row, a further increase of the key interest rate by 25 basis points at the July meeting seems a foregone conclusion. However, it seems realistic that the eleventh rate hike will be the last. Price pressures have recently eased across the board, and the inflation rate in June was only 3.0%, its lowest level since March 2021. If this positive development continues until the Fed meeting in September and core inflation also continues to decline, the US central bank will probably refrain from further interest rate hikes. The latest data points have fuelled hopes of getting inflation under control without stalling the economy too much. For this so-called "soft landing", it is now necessary to slowly transition into gliding flight."

"The development of the KfW ifo Business Climate Index in June joins the string of disappointing cyclical data. The temporary economic optimism of the spring has now evaporated. Instead, the German economy is currently in a kind of limbo. The surge in pessimism in the business community represents a downside risk to the current forecast of KfW Research, which like other institutions expects moderately negative growth for all of 2023 as a result of the weak start to the year but predicts at least a moderate economic recovery to set in from the second half of the year. However, with significant nominal wage increases and simultaneously easing inflation, the conditions for a moderate recovery in consumption in the coming quarters are still in place. Moreover, as a positive side of the weaker economic outlook, the signs of a continuing decline in inflation are strengthening.”

"The labour market continues to be relatively stable in the economic downturn. But the economic downturn is also making itself felt here: Many employers are looking a little less desperately for skilled workers. In April 2023, 42% of companies in Germany reported that their business activities were hampered by a lack of skilled staff. This is shown in the current KfW-ifo Skilled Workforce Barometer. At least this is a decrease compared to the peak last summer, when half of the companies were affected. However, this is only good news at first glance: the shortage of skilled labour remains at a very high level by historical standards. It has increased significantly since 2021, despite the Corona crisis and the serious economic consequences of the Russian attack on Ukraine. Among service providers, 47% are affected by skills shortages - the top figure among economic sectors. In manufacturing, in trade and in construction it is roundabout one third. In the eastern German states considerably more companies are hampered by a shortage of skilled workers than in the western states. The shortage is likely to increase again by the end of the year if the recovery continues. The urgency remains to address the shortage of skilled labour through measures to increase productivity as e.g. needs-based education and training, by mobilising the working-age population in Germany and through targeted immigration into the labour market."

"Inflation continues to lose steam. Energy is now less expensive for European consumers than it was a year ago, and the rise in food prices is also weakening. The killjoy, however, is core inflation, which is stubbornly trending sideways at a level that is clearly too high. Monetary policy is thus faced with the crucial question of how high interest rates still have to rise. Despite the recent deterioration in economic sentiment indicators and stagnating lending, a further interest rate hike in July is a foregone conclusion. Only if the effect of monetary tightening translates convincingly into easing price pressures across the board by September is this then likely to be the last rate hike."

“In Germany, base effects temporarily stalled the decline in the inflation rate. One year ago, the introduction of the 9-euro ticket significantly reduced service and core inflation from May to June. Now, however, annual inflation is being pulled upward because of the lower starting point. It therefore makes sense to pay more attention to seasonally adjusted monthly changes. In addition, it is important to consider the forward-looking inflation indicators: In particular, companies' sales price expectations point to a continued decline in inflation.”

"The ifo Index published today joins the string of predominantly disappointing indicators for the German economy. The optimism of the spring has now faded, and instead the German economy is currently in a kind of limbo, mainly because industrial production is barely getting off the ground despite easing supply bottlenecks and new orders have returned to the downward trend seen since the beginning of 2022. However, with significant nominal wage increases and simultaneously easing inflation, the conditions for a moderate recovery in consumption in the coming quarters are still in place, and the powder for industrial production is also still available in view of the still well-filled order books."

“Even if the share of businesses whose operations are impaired by skills shortages has decreased as a result of the economic slowdown, the fact remains that skills shortages continue to hinder a large portion of business activity in Germany - both in absolute terms and in a historical comparison. At this stage, it can be expected that the business cycle will gradually recover from the price shock in the further course of this year. This also means that skills shortages should increase again towards the end of the year if the recovery continues. Addressing the skilled labour shortage with measures aimed at increasing productivity, mobilising people who are fit to work in Germany and promoting skilled migration remain urgent tasks.”

„It is highly likely that the ECB will raise key rates again this week. Recent statements by Council members leave little room for doubt here, and an interest rate hike of 25 basis points is firmly priced into the financial markets. More relevant, therefore, is the question of how the monetary policy course will continue in the coming months. The interest rate peak in the euro zone is slowly coming into sight, but it is still uncertain where exactly it will be. Weaker economic data, the significant easing on the energy markets and the recent surprisingly sharp drop in inflation argue for an early end to the interest rate cycle. On the other hand, growing wage pressure and falling but still high inflation expectations call for caution. The regular update of inflation and growth forecasts may provide important information on how the ECB weighs up the data situation. My expectation is that the European central bank will play it safe and follow up with another interest rate hike in July.”

„After the Fed raised the key interest rate again at the May meeting, US Federal Reserve Chairman Jerome Powell gave very clear signals that no further hikes are planned for the time being. However, the latest economic data points will certainly again provide plenty of material for discussion in the Fed's decision-making body at the upcoming June meeting. After all, core inflation has been moving almost sideways for months and thus remains at a level that is clearly too high. Moreover, the recent agreement on the US debt ceiling has eliminated a major threat to economic development. Nevertheless, I expect the Fed to pause at the upcoming meeting after ten rate hikes in a row. Because for the first-time hairline cracks can be seen in the labour market, which has been buoyant for a long time, and the Fed would do well to wait and see when and how strongly the very rapid rise in interest rates over the last 15 months will affect the real economy.”

"The descent of inflation rates in the euro area will continue. This is due to the large price jumps in the previous year, i.e. a base effect. In addition, current inflationary pressures will ease significantly for many goods, as global materials bottlenecks are easing, energy prices have fallen and demand in the retail sector is weak. The inflation-dampening effect of the monetary policy tightening already implemented in the euro area is also likely to increase further in the coming quarters, but at the high current inflation rates various effects are particularly noticeable, leading to unusually high forecast uncertainty, including the feedback effect of inflation expectations on wage settlements."

“The spring labour market recovery is weak due to the economic slowdown. Many workers are cutting back on spending and drawing on their financial reserves due to dwindling purchasing power and uncertain future prospects. This puts downward pressure on private consumption and housing construction. Compared to the previous year, the labour market situation has deteriorated. At 2.5 million, the number of unemployed persons in May was 284,000 higher than in the same month last year. The increase was amplified by Ukrainian refugees. The unemployment rate was 5.5% in May, 0.6 percentage points higher than in the same month last year. A radical improvement is hardly to be expected this year. However, pessimism is exaggerated. The labour market is still in a mostly stable condition. This can be seen in the growing employment. At 45.8 million, the number of employed persons in April was 421,000 higher than in the same month last year. The need to secure skilled labour remains a major challenge despite the economic downturn. There is an increasing lack of domestic recruits to replace retiring workers. Employment subject to social security contributions can currently only increase thanks to the immigration of foreign skilled workers. It is urgent to pull out all the stops and address the shortage of skilled labour through measures to increase productivity, mobilising those able to work in Germany and targeted immigration into the labour market.”

"The direction is right, but there is still a long way to go. Consumers' sensitive loss of purchasing power was the main reason why Germany slipped into recession in the winter. The significant drop in the German inflation rate now at least brings some relief. In this context, the favorable development on the energy markets is also indirectly reducing price pressure on food and goods. Meanwhile, the more wage-intensive services are likely to ensure that core inflation falls only hesitantly. Good sentiment indicators for this sector of the economy point to a favorable demand situation. This makes it easier for companies to pass on cost increases. Further interest rate steps by the ECB are therefore foreseeable despite falling inflation."

“Germany is currently exposed to opposing economic forces. The positive effect of easing supply chain disruptions and significantly lower wholesale prices on the energy markets is less significant than the burden of lost purchasing power and the restrictive monetary policy stance. All in all, business sentiment clouded over in May, ending a streak of six consecutive increases in the business climate. The outlook for economic growth in the further course of the year remains subdued.”

“VC sentiment improved slightly in the first quarter of 2023, but it's at a historically low level. The insolvency of Silicon Valley Bank has certainly prevented a stronger upturn in sentiment. In Germany, SVB mainly operates a venture debt business, so a lower supply is to be expected at first. This is very unfortunate timing in view of falling venture capital investment, which makes venture debt more important as bridge financing. However, VC business expectations have improved significantly, so the market appears to be assuming that the worst is behind us. A good signal for start-ups that need fresh capital.”

German Venture Capital Barometer 1st Quarter 2023(PDF, 225 KB, accessible)

“This week, the central banks are the focus of attention. The Fed's interest rate decision on Wednesday will be followed the next day by the monetary policy move by the European Central Bank.

The Fed's aggressive interest rate hikes are increasingly having an impact in the USA. The lending policy of US banks has tightened significantly in recent months and is thus having a dampening effect on inflation. This has contributed to the fact that the inflation rate is now at its lowest level since May 2021. The Fed meeting next week is therefore likely to see a final hike in the key rate of 25 basis points. However, as core inflation in particular still remains at too high a level, the Fed will leave the key rate at the restrictive level of 5.00% to 5.25% for several months.

The ECB probably still has a longer way to go than the Fed, because in the USA the core inflation rate is already somewhat below its peak reached in September. In Europe, the slowdown in energy prices has been the main factor curbing inflation so far. However, the data-oriented ECB Council is unlikely to consider an end to the cycle of interest rate hikes until a sustainable downward trend in core inflation becomes apparent. We are still some way from that. I therefore expect that key rates will continue to rise but at a slower pace. The rate hike of 25 basis points this week is likely to be followed by another in June.”

“Today's inflation data will be watched with wary eyes, because the ECB Governing Council has not given any forward guidance for its meeting on Thursday and different voices have recently been heard from among the Council members. On the table is another 25 or 50 basis point increase. Despite persistently high core inflation, a move to smaller rate steps is the most likely outcome. This is because, in view of the rapid decline in sales price expectations and the fact that materials bottlenecks have now largely been resolved, price pressure from the goods component in the basket of consumer spending is likely to fall. In the case of services, on the other hand, the wage trend is becoming more important; while it is currently picking up, it could be partly offset by falling profit margins.”

“Germany narrowly misses a technical recession in the winter half-year! After the decline in the final quarter of 2022, GDP stagnated at the beginning of the new year. The recovery of industry since the turn of the year was apparently sufficient to compensate for the continuing burdens on consumption. Whether it will now be possible to avoid a contraction of the economy in 2023 as a whole remains to be seen. In any case, we would be well advised to keep expectations low: Monetary policy will only start to have its full braking effect this year and the losses in purchasing power suffered by private households are likely to reverberate for some time to come. The economy may be prevented from contracting, but even with a more favourable development it will presumably only get a little beyond stagnation.”

“The German labor market has so far survived the consequences of the Corona crisis and the Ukraine war with surprisingly few bruises. This is mainly due to the more noticeable shortage of skilled workers. In purely numerical terms, the number of qualified young people in Germany is smaller than the number of skilled workers retiring. This is particularly true for apprenticeships. This makes it all the more serious when many young people remain without training after leaving school. 17 per cent of 20- to 34-year-olds, or 2.5 million young people, had no vocational qualification in 2021. This is an all-time high and a worrying development. The future prospects of these young people are at stake, because a lack of training is still the number one unemployment risk. All parts of society and the economy are called upon to contribute to concrete solutions.”

“With the data published today, it is official how well the euro area has weathered the acute phase of the energy crisis. Whereas a year ago a gas supply freeze was feared to lead to a significant recession just at the beginning of 2023, there is now a growth of 0.1%. In fact, the euro economy already benefited from the improvement in the supply shocks in the winter quarter. Global materials bottlenecks have largely dissipated and wholesale energy prices have fallen significantly since the end of 2022. Both gave a boost to industrial production in particular, and there was also a short-term rebound in construction output. However, the development in the services sector remains uncertain. Here, the statistical offices still have to estimate a lot in their initial reports, and it is quite possible that revisions will therefore still occur. Since the pandemic, the susceptibility to revision of the first official growth estimates has increased significantly.”

"Following the significant decline in German inflation in March, it is now displaying some stubbornness. The rise in consumer prices weakened only slightly. Some patience is still required before inflation falls back to the aspired 2 per cent. After all, the easing of energy prices is only half the story. Services, which are highly weighted in the basket of consumers spending, are increasingly becoming the focal point of inflationary trends. However, the development of producer and import prices, which cover early phases of the economic process, shows us that the direction is right. I therefore expect the downward trend in headline inflation to continue, albeit at a reduced pace for the time being. It is important that the ECB continues to signal resolve in the face of stronger wage growth and some positive surprises in economic data."

"The US economy has started 2023 weaker than expected. GDP grew by only 0.3% in the first quarter compared to the previous quarter. The main pillar of the economy continues to be private consumption, which grew by 0.9%. However, the significant rise in interest rates will increasingly make itself felt in this area in the course of the year. Data from March show that rising borrowing costs mean that households are now holding back on purchasing new cars, for example. The effects of the Fed's aggressive interest rate hikes are even more noticeable in the housing market, and business investment is also becoming increasingly difficult due to higher financing costs. Although the interest rate peak will probably be reached soon, high inflation will force the Fed to remain at the restrictive interest rate level for the rest of the year. The turmoil in the banking sector is likely to further dampen credit supply and thus a further cooling of the US economy can be expected."

“The start of the spring quarter has been successful in economic terms: After the initially enormous worries about energy security, the mood in companies continues to warm up as the winter is now well over. The German economy has regained its footing for the time being, but we should be warned not to expect too much: monetary policy will only start to have its full braking effect this year and the losses in purchasing power suffered by private households will probably continue to reverberate for some time. The economy may be able to avoid a contraction in 2023 as a whole, but even with a more favourable development it would presumably be little more than stagnation.”

„The recovery rally in the ifo business climate continues in March. Apparently, the turbulence in the US banking sector has so far not affected the sentiment of German companies. The relief about the well weathered winter and the significant drop in energy prices just prevails."

„The US Federal Reserve is currently in a tricky situation. On the one hand, core inflation is still at too high a level, and a further significant increase in the key interest rate is appropriate from this perspective. On the other hand, the key interest rate has already been raised by a significant 4.5 percentage points within a year and the associated price losses on US government bonds have already put three banks in the USA in difficulties. In its interest rate decision, the Fed is treading a fine line between continuing the fight against rising prices and at the same time maintaining financial stability in the banking sector. Although a rescue network of various measures has calmed the markets somewhat recently, the situation remains tense. I expect the Fed to follow the ECB's lead and give top priority to fighting inflation with another 25 basis point rate hike. Particular attention will therefore be paid at the Fed's press conference to possible statements by Fed Chairman Powell on the basis of current events on possible further support measures for the banking sector or statements on the further duration or level of the further interest rate increase cycle.”

“For the upcoming meeting of the ECB Governing Council, I expect the ECB to follow up its announcements with another interest rate hike of 50 basis points. The continuing high inflation rates in Germany and the euro area in February have once again made it clear that it is still too early for inflation to develop and that further interest rate steps will probably be necessary at the coming Council meetings. Only in this way – and also with the risk of overshooting the target from a cyclical perspective – can inflation be brought close to the 2% target in the long term. At its peak, the deposit rate should then be up to 3.5%. In addition to the interest rate steps, the reduction of the Eurosystem's balance sheet also slips into focus with this meeting. At its peak last summer, this was EUR 8.8 trillion. Between the end of March and the end of June 2023, EUR 15 billion per month of redemption contributions from the APP securities purchase programme are to be reduced. From the second half of the year onwards, this volume is likely to be increased, up to EUR 30 billion would be conceivable. In the short term, however, the largest contribution to the reduction of the balance sheet will come from the repayments of the targeted longer-term refinancing operations (TLTRO) by the banks. By the end of 2024, the ECB balance sheet total should fall to between EUR 6 and 6.5 trillion. The ECB faces extremely difficult trade-offs between, on the one hand, tightening quickly and significantly enough to bring inflation back to the 2 per cent target on a sustainable basis and, on the other hand, avoiding turbulence in the bond markets and the economy. Finding the exact appropriate dosage is more of an art than a science. “

“The inflation rate in the euro area published today makes it clear why the ECB will stick to its restrictive monetary policy for the time being and follow up with further interest rate hikes. The worst of inflation is probably behind us now that the warm winter weather has been accompanied by a calming of energy prices. Nevertheless, the core rate (excluding energy and food prices) remains well above 5%. This is similar to the worrying picture in the US. There is still upward pressure on goods and services prices and it would be wrong to talk of an all-clear. This means that even beyond the meeting on 16 March, when a further hike of 50 basis points is considered a foregone conclusion, further interest rate steps are possible and necessary. The debate about the right pace of monetary policy is complicated by the economic situation: the effects of the tighter monetary policy are now clearly visible: the more credit growth declines, the more likely it is that households will also hold back on their purchases.”

“The German economy is holding up better in the ongoing crisis environment than feared just a few months ago and a steep economic crash is unlikely to occur. The labour market, which remains robust, has played a major role in this. Many companies are desperately looking for skilled workers to fill the record number of vacancies. All in all, this will largely support purchasing power, although high inflation will continue to weigh on many households. For the next winter, it remains important to prevent a gas shortage with rationing. But there is almost a whole year to do this. How strong the upswing will be after the energy crisis also depends on how well the shortage of skilled workers can be contained. What is needed is an increase in labour force participation, immigration and a further reduction in unemployment. This requires improved incentives to take up work and the removal of barriers that in fact prevent women in particular from working, as well as increased efforts to qualify and integrate the unemployed and immigrants. Equally important is increasing labour productivity through investment and innovation. The lower the labour productivity, the higher the demand for labour. Labour productivity per hour worked grew by a meagre 0.3% in 2022. This is far too little to effectively reduce the shortage of skilled labour.”

“There was a curiosity in the consumer price index (CPI) at the beginning of the year. On the one hand, the price brake for natural gas artificially pushed the December value down. On the other hand, the rotational adjustment of the CPI base year to the year 2020 and changes to the index weights led to the record inflation of 10.4% in October statistically becoming "only" an inflation rate of 8.8%. The significant decline observed since the peak in October has thus statistically become only a mini-decline of 0.1 PP. Nevertheless, the inflation figures published today make one thing clear: we probably left the peak of inflation behind us last autumn. The momentum of energy price inflation has been clearly declining recently and food prices are also showing signs of plateauing and weakening momentum. Prices for goods and services, on the other hand, still have room to rise, as higher energy costs that companies pass on to consumers are still having an impact. It will probably take a while before they give way. Therefore, the order of the day for the ECB is to stay on course despite the economic slowdown.”

“While Lent begins today, according to the ifo Business Climate the year could turn out far less lean for the German economy than long feared. The business climate index has risen for the fifth time in succession, again due to a brightening of expectations. Nevertheless, a strong economic headwind continues to blow, as the dampening impact of monetary policy is only likely to take full effect this year and the real wage losses are reverberating. Measured against last year's fears, however, even stagnation in 2023 would be quite a success.”

“The increase published today is the missing piece of the puzzle that was missing for a consistent assessment of the ECB's monetary policy decisions from last week. Decisive and robust action by the ECB is also necessary in the coming months. This is the only way to ensure that inflation falls to 2% in the medium term and that expectations remain anchored. Although the peak has probably been passed, it is premature to sound the all-clear: inflation has reached the breadth of the economy. While pressures from energy prices will decline in perspective, service and industrial goods prices are gaining in importance this year. This is reflected in core inflation. This is currently a more adequate measure to get to the bottom of fundamental price pressures, as government relief measures make it difficult to interpret the overall rate.”

“At its meeting today, the ECB stayed the course it started last summer and raised key interest rates by another 50 basis points. While the monetary indicators for December show that the impact of rising interest rates is starting to be felt, the ECB has not yet made a move. Households and businesses have shifted their money mainly into longer-term deposits. With only a very subdued economic outlook, caution is also growing on the part of banks in lending; a slowdown in credit growth is to be expected. At the same time, the interpretation of inflation rates is difficult because many special effects are at work, especially government price brakes, and it is still unclear how these are accounted for. The reasons for price pressures are shifting away from energy prices and it is all the more important that the ECB keeps a close eye on the development of the core inflation rate. This has so far shown little sign of slowing. On the contrary, the strength of the labour market suggests that wage growth and services inflation will be more persistent and further interest rate moves will be needed at the upcoming Governing Council meetings.“

„In the USA, the inflation rate fell for the sixth month in a row in December. While this is a welcome development, the core inflation rate of 5.7% is still clearly too high and therefore the key interest rate was raised by 25 basis points to the new range of 4.5% to 4.75% at the February meeting. The renewed reduction in the interest rate step compared to the December meeting indicates that the Fed is slowly ushering in the end of the interest rate cycle. For the next few meetings this year, however, the Fed will be looking very closely at the still extremely tight labour market and the accompanying wage pressures. One or two more rate hikes therefore seem quite possible."

"The inflation numbers at the beginning of the year show it once again: The target of 2 per cent is still a long way off for the ECB. Given the magnitude of the price increase, it is ultimately irrelevant that adjustments to the weighting scheme and changes in government energy market interventions had a strong impact on the price measurement in January. After all, the decisive factor for the orientation of monetary policy is rather how inflationary pressures develop across the broad economy. The core inflation rate is likely to remain stubbornly high in 2023. This is driven by an improved economic outlook, a tight labor market, substantial wage demands and a high share of European companies expecting selling prices to continue to rise. Even if the pace of consumer price increases slows significantly in the coming months due to declining contributions from energy price inflation, further interest rate steps by the ECB are essential because of the persistently high core inflation.”

"In the US, economic output grew by 0.7% quarter-on-quarter in the final quarter of 2022. Weak investment in the real estate sector was offset by stable private consumption and solid demand for capital goods. For the year as a whole, this results in GDP growth of 2.0%. However, there are increasing signs that growth will be lower in 2023. The main reason for this is the US Federal Reserve, which raised the key interest rate by a hefty 4.25 percentage points last year to combat inflation. This increases the cost of financing for companies and the cost of credit for consumers, which has already left its mark on the housing market in particular. Although the US labour market is still very stable, sentiment among US companies has already deteriorated noticeably recently. A recession this year seems possible, even if it will probably be a mild one.”

“Companies are starting the new year in a better mood, and fears of a sharp economic downturn are fading more and more. In 2022 as a whole, GDP grew by almost 2% and was also virtually stable in the final quarter. The fact that the German economy has held up so well so far despite the polycrisis is encouraging. The risk of a gas shortage this winter has also been averted and the energy price brakes are dampening the expected decline in private consumption in view of the sharp rise in the cost of living. However, the sluggish global economy is clouding the export outlook and the ongoing war in Ukraine continues to create enormous uncertainties, making investment decisions more difficult. All in all, the risks remain high and the burdens continue to be considerable, but on balance they are easing.”

“Around 2% growth despite a serious energy crisis and record high inflation -– that is a respectable result, made possible by the stabilisation policy of the German government and the adaptability of many companies. Nonetheless, the macroeconomic losses were still considerable: Before Russia's assault on Ukraine, growth was expected to be roughly twice as high, which already makes a difference of around EUR 70 billion. Above all, however, the development of price-adjusted GDP is currently significantly overstating the real income development of the population. As the current inflation has been driven by particularly sharp increases in import prices, consumer price inflation is much stronger than the price increase in goods and services relevant for GDP.”

“New years are a moment of pause - even for forecasters. While in 2021 the rapidly rising inflation still surprised many, it was clear at the latest with the outbreak of war at the beginning of 2022 that prices would continue to rise for the time being. Despite the continuing high level of uncertainty, however, the chances are good that inflation in 2023 will be lower than in the previous year. Tighter monetary policy, weaker economic activity and a relative calming of energy markets should contribute to this. Already in December, HICP inflation in the euro area is likely to have been significantly below its previous month's level, although this is mainly due to the waiver of the gas discount payment in Germany. In contrast, inflation is likely to have increased further, especially in the core components, i.e. services and goods excluding energy. Here, catch-up effects of the pandemic and indirect effects of higher energy and food prices are still at work. The further interest rate hikes expected from the ECB in the coming months therefore seem appropriate.”

"The first stage of the gas price brake makes it possible: At the end of the year, the inflation rate falls into the single digits due to the dampening of the rise in energy costs. This is a welcome financial relief for many households and should support the economy. In the coming months, too, government measures will reinforce the decline in the inflation rate expected for 2023. The price brakes limit the passing on of higher procurement costs for electricity and gas to end consumers. However, it would be a mistake if the ECB were tempted to end the tightening of monetary policy prematurely. The view of the core inflation rate becomes more relevant for the determination of the key interest rate path, because it is not influenced by the direct price effects of the energy market interventions and second-round effects of the shock could only become apparent here."

“Despite all the uncertainties that last year brought for the German economy, the labour market was an anchor of stability. However, a closer look at the labour market balance at the turn of the year shows light and shade. On the plus side, the number of people in employment still rose until November. The number of unemployed also increased in the second half of the year, but mainly because of job-seeking refugees from Ukraine, less because of the worsened economic situation. The labour market has thus continued to weather the Russian war of aggression and the associated energy crisis well so far. The extension of the enhanced short-time allowance also contributed to this. In October, 163,000 employees received cyclical short-time allowance, 86,000 more than in August. On the debit side are the loss of purchasing power among employees and the growing shortage of skilled workers. Real wages fell by 4% in the first three quarters of last year. The shortage of skilled workers has worsened in 2022 despite the crisis. The new KfW-ifo Skilled Workers Barometer shows that almost half of companies were affected in October. If the German economy comes through the winter largely unscathed, as expected, the shortage of skilled workers will worsen as the economy picks up over the course of the year. This will slow down the recovery and lead to further gaps in the supply of goods and services. This makes it all the more urgent to take swift action now to curb the shortage of skilled workers more effectively and to introduce further proposals. This cautiously confident forecast rests on uncertain foundations. One serious risk is that a gas shortage with rationing could still occur. Even though the likelihood of this has decreased significantly for this winter, the gas supply for next winter is not yet assured.”

“Companies are increasingly saying goodbye to the mood of doom and gloom that prevailed in the meantime, and they have good reason to do so. Even if the very optimistic hopes for the economy of around 4% growth in 2022 a year ago had to be buried quickly under the thunder of the Russian cannons, German economic growth has been surprisingly robust so far and will even come close to the 2% mark in 2022 as a whole. Companies can certainly draw some confidence from this respectable growth result despite the decidedly complex crisis situation, at least in relative terms. The shock to purchasing power and the reluctance to invest that is to be feared with the continuing uncertainties are preparing the ground for a recession. However, I expect economic output to decline by only around 1% in 2023, which seems moderate to me under the current circumstances.”

"The US Federal Reserve raised interest rates by a whopping 3.75 percentage points this year. The Fed now has to show a fine touch as it proceeds. On the one hand, the fight against inflation, which is still far too high, must be continued, on the other hand, interest rate increases always have a time lag on the real economy and there is a risk that economic development will be slowed down too much. I'm assuming the Fed will slowly begin the descend at the December meeting. After the last four rate hikes of 75 basis points, I expect an increase of only 50 basis points for the last meeting of the year. In the course of the publication of the new Fed forecast, however, I expect a clear commitment to raise the key interest rate by around a further percentage point in the coming year. Because despite the recent slight fall in the rate of inflation, the dangers of a wage-price spiral and further increases in inflation expectations have not yet been averted.”

“Next week's ECB Governing Council meeting will be about setting the monetary policy course for 2023. The aim must be to bring inflation close to the 2% mark again after two years of rates that are clearly too high, and to reach the target again in 2024 and 2025. In view of the persistently high inflation rates, even another 75 bp rate step should be surprising but appropriate. A noticeable slowdown in the pace of tightening, on the other hand, is not likely to follow until next year. The ECB can thus prove that it will "stay the course" in the sense of its mandate even if the economic environment continues to deteriorate. In this way it also guarantees that inflation expectations remain anchored. Admittedly, the risk of exacerbating the looming recession increases with every further interest rate step. But the consequences of a persistent, significant failure to meet the inflation target are likely to be more severe and cost more prosperity.“

“Despite the onset of recession, employees have reason to look forward to the new year with cautious optimism. For the labour market is once again proving to be an anchor of stability. Measured against the rampant pessimism in companies and earlier crisis years, the decline in economic output will be moderate. In the second half of 2023, things should start to look up again in Germany. For the labour market, I expect the number of people in employment to fall slightly in winter. After that, it should rise again, albeit slowed by the shortage of skilled workers. For 2023 as a whole, I expect the number of people in employment to rise by about 100,000 to 45.6 million. The number of unemployed is also expected to rise by about 100,000 to an annual average of 2.5 million, and the unemployment rate from 5.3 to 5.4 %. The forecast is subject to the proviso that a gas shortage with rationing for the German economy is avoided, international supply chain problems ease, inflation does not depress the propensity to consume too much and wage demands remain within the currently agreed framework. The central challenge remains to contain the shortage of skilled workers. In addition, the integration of the unemployed and refugees into the labour market must be tackled. For both, the qualification efforts must be considerably intensified.”

“Today's inflation figures are being eyed very closely in the Governing Council. After virtually all inflation forecasts for this year were wrong, the ECB is currently very much guided by the latest data releases, i.e. monetary policy is now increasingly made with the rear-view mirror. With inflation having fallen somewhat in November and the deposit rate already close to the neutral level often estimated at 2%, many Council members will argue for a smaller rate move of only 50 basis points at the next meeting. However, a further reduction in the pace of interest rate steps or even a halt to the rate hike cycle can only be expected when inflation rates have turned to a clear downward trend and forward-looking indicators point consistently downwards.”

“Despite the slight decline in inflation, it is clearly too early to sound the all-clear. Although producer price inflation even fell significantly in October, it remains at a very high 35 per cent. This suggests that this could be reflected in very high consumer price inflation rates for a few more months and that we are dealing with a plateau of high inflation rates. I do not expect the situation to ease until the end of the heating period and when the government's relief measures show their effect. In Germany, inflation is likely to remain significantly elevated in 2023, even if it shows a downward trend in the course of the year. While the contribution of energy and food inflation to the overall inflation rate will decline in 2023, service inflation will continue to pick up. This means that core inflation will probably also remain above 2% and even exceed headline inflation by the end of 2023. For central banks, "stay the course" is therefore the order of the day. Weighing up the risks, underestimating inflationary pressures again would cost more prosperity in the long run.”

The significant rise in ifo business expectations is justified, as companies have recently been as overly pessimistic as only before the biggest recessions. However, slumps such as those seen in the financial or Corona crises are only likely in the event of a gas shortage, which we should be able to avoid thanks to full storage facilities and, above all, considerable savings efforts by companies and households. In addition, the slump in consumption is likely to be cushioned by the federal government's relief packages and households' financial reserves. However, even though the very worst excesses have now been corrected, sentiment is still poor. We therefore fear that corporate investment activity will slow significantly, which in turn will intensify the recession in the coming year.

“At the end of October the Federal Statistical Office surprised with the announcement of positive third quarter GDP growth which, as the icing on the cake, was actually driven by household consumption despite the depressed mood among consumers and retailers. Excess savings and pent-up demand from the lockdown periods are still likely to play a role here, and purchasing power losses resulting from the energy crisis can also be offset by a declining savings rate. These effects are set to stabilise consumption in the winter half-year as well, although it will probably drop nonetheless. Furthermore, the ECB’s rapid interest rate turnaround, the continuing very pessimistic business expectations and banks’ increasingly restrictive lending policies – particularly towards small and medium-sized enterprises – are creating strong headwinds for investment. If that were to cause the cancellation of, in particular, investments needed to achieve a future-proof and net-zero economy, the damage would be great.”

"Germany is facing a winter in which employees and companies will have to draw on their reserves. The stagflation nightmare has become reality, at least until next spring. For most workers, this means real wage losses. The latest wage settlements are well below the rate of inflation. Collective bargaining parties and employers are making use of the federal government's offer of tax-exempt one-off payments. This makes sense because it helps to break the high inflation and strengthens workers' motivation and loyalty. The strong inflation devalues incomes and savings, especially middle- and low-income earners are affected. Forced consumer restraint reinforces the economic slowdown. Fortunately, the situation is still far better than the mood. The recession has been mild so far. This is also evident on the labour market. Employment is expected to fall over the winter months. But many employers will continue to struggle to find scarce skilled workers. There is a shortage of IT specialists, building tradesmen, nursing staff, teachers and educators, among others. Skilled labour shortages will noticeably dampen the economic recovery next year. It is therefore very welcome that the federal government has adopted a new skilled labour strategy. What needs to be added to it is the strengthening of weak productivity growth. For with stronger productivity growth, the demand for labour would fall. It would be wrong to ignore this."

"The Corona recovery is increasingly overshadowed by the energy crisis. We will see weak growth in the Eurozone in the next few months at best. However, given the fierce headwinds for the economy, it will be very difficult to avoid a recession. The loss of purchasing power due to high inflation is immense, consumer sentiment has plummeted. One bright spot so far is the robust labour market, which should prevent a crash in private consumer demand. Despite the downward correction of electricity and gas prices, the energy shortage in Europe continues to cause concern and remains a considerable risk for short- but also medium-term economic development. It would be desirable for the EU to make faster progress in developing a well-designed, coordinated policy response to the energy crisis."

“Inflationary pressure in the euro area remains enormous. Despite historically poor sentiment indicators and the rapidly increased probability of a recession in the winter quarters, a turnaround in consumer price development is still pending. Despite initial prophecies of doom that excessive interest rate hikes could exacerbate the impending downturn, the ECB is consistently continuing its fight against inflation. In addition, it signalled last week that further interest rate steps are to be expected in the winter months. This policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations. Admittedly, the risk increases that the ECB itself will become an economic risk. However, in view of the strong increase in the core rate, this consistent action against inflation is indispensable.”

"German GDP surprisingly expanded in the third quarter, but for this quarter and the next virtually all indicators are pointing to a recession. The energy crisis alone has already taken its toll on the German economy, and the fact that central banks around the world are slamming on the brakes in the face of far too high inflation rates is increasingly affecting the economy. But there are also some factors that argue for only a relatively shallow recession, such as the decreased likelihood of a gas shortage this winter, the significant drop in wholesale gas prices compared to August, or the fairly extensive relief packages. Either way, however, this recession will feel much more severe to most people than it will register in the national accounts: Because current inflation is being driven strongly by import prices, consumer price inflation is much more pronounced than price increases for domestically produced goods and services. The decline in price-adjusted GDP therefore significantly understates the real loss of purchasing power by the population. ”

“Inflation remains in double digits! The German economy is currently in stormy seas and a drift into recession is quite likely in the coming months. Persistently high inflation rates could exacerbate the impending downward spiral. For example, the energy crisis and the sharp rise in food prices are now reaching the broad middle of the population. This is also reflected in indirect price increases, for example in the service sector. Moreover, the ECB is rapidly tightening policy rates to send a strong signal that it takes its mandate of price stability seriously and is expected to maintain this stance in the first half of 2023. The high cost of living and tighter monetary policy are thus increasingly posing a risk to the economy, even if the latter is indispensable in the current inflationary environment.”

"All indications are that the Fed will raise the key interest rate by 0.75 percentage points for the fourth time in a row at its November meeting. In addition, the balance sheet will continue to be reduced by 95 billion US-Dollars per month. The Fed is trying to put the inflation genie back in the bottle. Core inflation has recently risen further and is now at 6.6%, mainly due to higher prices in the service sector. The rapid increase in the key interest rate is particularly noticeable in the real estate sector, which has recently cooled down considerably. However, it will probably take until spring of next year before the increased financing costs have fully reached the real economy. Then the time will come for the Fed to slow down the pace of interest rate hikes.”

"The ifo Index interrupted its downward trend in October thanks to slightly less pessimism. Apparently, the 200 billion "Wumms" from the German government has stabilized companies' business expectations. They are also noting that the probability of a gas shortage has shrunk thanks to full storage facilities and good savings successes. Whether this remains the case depends, on the one hand, quite banally on the weather. On the other hand, the savings efforts of households and companies must be sustained, even despite the planned subsidies. To this end, the planned gas price brake is basically the right concept, but its effect on households in particular must be well communicated."

"Despite many signs of recession, the Governing Council is currently clearly prioritizing the fight against inflation. A further XL interest rate step of 75 basis points is therefore virtually a foregone conclusion for the upcoming ECB meeting. By contrast, the reduction of securities holdings under the APP program is much more controversial. Even if this only involves waiving the reinvestment of funds from maturing bonds, it could lead to critical spread widening in the current market environment. A decision on an exit date is therefore not to be expected until the next meeting or the one after that, and even then a back door will probably remain open. By contrast, the Governing Council wants to end the free lunch that the ECB is currently serving the banks by paying interest on funds from the TLTRO program at the deposit rate as quickly as possible. Since large sums of liquidity are at stake here and the concrete solution is still rather unclear, this will probably be the main focus of attention on the capital markets on Thursday."

“Given the looming recession, the huge spikes in energy prices and rising interest rates, more cautious bank policies and worsening financing terms were to be expected. It is therefore surprising that the situation for large enterprises has eased for the second consecutive quarter, unlike in the SME sector. The advantage which large enterprises traditionally have in accessing credit is therefore widening significantly.

A possible explanation for this discrepancy is that high financing requirements for working capital and storage are emerging as a consequence of the massive increase in energy prices and persistent supply bottlenecks, and that businesses are reluctant to invest at the same time because of the high uncertainty. In order to close such liquidity gaps, businesses could start by mainly drawing on existing lines of credit that do not require any new negotiation.”

KfW-ifo Credit Constraint Indicator Q3 2022(PDF, 256 KB, accessible)

“Germany is drifting into a recession. GDP probably contracted already in the summer, and at least two further negative quarterly rates will follow. The terrible mood, especially in consumption-related sectors, and the depressed expectations everywhere illustrate what challenges Germany currently faces in the light of exploding costs of living and energy prices as well as the uncertain supply situation, particularly for natural gas. Winter is near, and the first priority is to get through the cold season as unscathed as possible. Even though a recession is practically certain, however, it could end up being less dramatic than the depressing mood suggests. With respect to business expectations in particular, high levels of anxiety are also likely to play a role in addition to legitimate concerns over energy cost pressure and dwindling sales prospects. The recently announced fiscal support package of EUR 200 billion has the potential to relieve businesses and households from some of the cost pressure. The electricity and gas price caps in particular are likely to bolster consumption noticeably. I still believe our GDP forecast of 0.3% for 2023 to be plausible, but the downward risks are high and growing.”

KfW-ifo SME Barometer September 2022(PDF, 227 KB, accessible)

"Prices in the euro area are rising faster and faster. At the same time, the consequences of persistently high inflationary pressures are becoming obvious. The euro area is almost certainly facing a recession this winter. Many households and businesses are approaching or have already reached their financial pain threshold. For the ECB, it is now a matter of resolutely pursuing a course of monetary tightening. However, the central bank can only limit the economic costs of the energy crisis. Governments need to create the framework for a significantly accelerated energy transition and facilitate private investment in this area. Nevertheless, Europe will continue to rely on very expensive energy imports for the time being. This is a reality that we have to face."

"With the expiry of the fuel discount and the 9-euro ticket, inflation rose sharply in September and has now even cracked the 10% mark. The price hammer is currently coming from electricity and gas. Gradually, the exorbitant wholesale prices are trickling through to households. The new contract prices shown on comparison portals, which exceed previous year's values by multiples, offer a foretaste, while the average household “only” saw gas prices rise by 59% and electricity prices by 17% in August. Until the end of the year, inflation is therefore likely to rise even further, and then much will depend on the design of the electricity price brake and the planned relief for gas customers."

“The cold season begins and the mood in companies follows the temperatures on the way down – unfortunately very understandable. For it will soon become clear whether Germany will actually get through the winter without a gas shortage; in any case, the challenges in the upcoming heating period are enormous. The high storage levels of now a good 90% make it plausible that rationing in the gas-intensive industries can be avoided. However, in the event of an exceptionally cold winter or insufficient energy savings in the household sector, it would be a matter of a knife-edge. And with the de facto suspension of Russian gas supplies, the downside risks for the economy, which is already on a moderate recession course, have recently increased even further.”

"Although falling fuel prices in the USA have recently contributed to a slight decline in the inflation rate, rising housing costs have pushed core inflation up to 6.3% in August. The Fed will therefore continue its fight against rising prices unabated: For the upcoming September meeting, it is likely to raise the key interest rate by 75 basis points for the third time in a row. Such a decisive approach will help to further lower the inflation expectations of market participants and consumers. Howev-er, fears of further escalating price increases are still present. The Fed must therefore give credible assurances that it is willing to keep inflation under control at all costs. Further interest rate steps in the final quarter are therefore indispensable."

“The mood is bad, the outlook is dismal. The only times when SMEs’ expectations were this pessimistic was before what were by far the deepest recessions in the Federal Republic of Germany’s history – at the beginning of the global financial crisis in the winter of 2008/2009 and after the outbreak of the coronavirus pandemic in the first half of 2020. However, with a view to the construction of the index we need to put the depressing business expectations into perspective. They measure how widespread the fear of an economic crash is. In other words, they reflect the wide variety of fears and concerns around the war and the energy crisis across the breadth of the corporate landscape. But they are not a reliable measure of the depth of the feared downturn itself. We currently assume that Germany is at the beginning of a technical recession that will end up being much milder than the downturns during the financial crisis or the coronavirus crisis.”

KfW-ifo SME Barometer August 2022(PDF, 133 KB, accessible)

“I am very concerned about the high inflation rates in Germany and Europe and it will take some time before the trend is reversed. Today's decision by the ECB to send a clear signal with a 75 bp rate hike and to resist the calls of doom on the economy was therefore all the more correct. In view of the revisions to inflation and growth forecasts, the interest rate decision reflects the central bank's new determination to bring inflation back "on target" and, above all, to anchor long-term inflation expectations. However, this course will still require some sacrifices and necessary demand-side adjustments by households, businesses and the government. This is likely to exacerbate an economic slowdown in the euro area, especially as price pressures have broadened in recent months. The equally rapid rise in core inflation to 4.3% in the meantime will make it necessary to maintain the tightening course in the coming months. If, on the other hand, the ECB eases too soon, it runs the risk that the successes achieved will have been in vain and that the long-term economic costs of reducing inflation will only have increased. It would then have literally thrown out the baby with the bathwater.“

“Although the economic outlook in the euro area is becoming increasingly gloomy, we are still far from a trend reversal in inflation. This is also reflected in the figures for August published today, in which inflation continued to rise. Looking ahead to the rest of the year, the direction of prices should also be clear. The unabated rise in food and energy prices, especially electricity and gas, is likely to push inflation in the euro area above 10% in the final months of the year. For the ECB, this means giving top priority to the fight against inflation and consistently pursuing the path of interest rate adjustment. Perhaps it will dare to take the 75 basis point step at the September meeting. The pressure will also remain high in October. Admittedly, this increases the risk of missing a soft landing. However, against the background that inflation is becoming more and more widespread, consistent action against inflation is essential.”

“The German economy is in for a rough ride. The Ukraine war and Russia's contract breaches and supply restrictions in the natural gas business are driving up energy prices, weakening purchasing power and causing great uncertainty. The coronavirus crisis is still weighing on the global economy due to disruptions in supply chains and production stoppages. All this leads to restraint among consumers and investors. Nevertheless, the number of job vacancies is far higher than before the coronavirus crisis. The reason for this is full order books and the expectation that the worst supply bottlenecks will be resolved in the foreseeable future. Those who will then have the necessary skilled workers can consider themselves lucky. For beyond the current crises, the supply of skilled workers will determine the growth and competitiveness of German companies in the future. The pressure to act is greater than ever because the measures taken so far have been far too timid. Much more decisive action is needed here! Germany needs a strategy for securing skilled labour that does far more than it has done by now to combat the declining supply of skilled labour and the stagnating productivity of the labour force. It is also important to revive investment and innovation.“

“The inflation rate in Germany remains high in August. Compared to July, it has once again risen significantly. Without the relief measures, some of which will continue until the end of the month, such as the 9-euro ticket and the fuel rebate as well as the abolition of the EEG levy in July, this increase would probably have been even more pronounced. This is because from September onwards there is likely to be a further upward trend, with the threat of further adversity in energy and services in particular. Due to the further adjustment of existing energy supply contracts to the rapidly rising market prices, inflation could rise to double-digit growth rates in the final quarter. For the ECB, this means that it must give top priority to fighting inflation despite the deteriorating economic outlook.”

“By definition, two consecutive negative quarters means we are in a technical recession. In practical terms, however, our economic forecast means stagnation or – given the very high inflation we are seeing – stagflation in the coming year as opposed to a genuine recession. The moderate 0.3% contraction of GDP in our new forecast includes 0.2 percentage points which is attributable to a lower number of working days in 2023, meaning a negative calendar effect. As skills shortages remain high, we also expect relatively steady employment because in spite of the tense economic situation, businesses are thinking twice before dismissing any workers.

Energy price inflation in Germany is likely to spike again in the autumn, driven by the recently adopted gas levy and regular gas and electricity retail price adjustments to reflect the massive increases in wholesale prices. Besides, disinflationary measures such as the 9-euro ticket and the fuel tax rebate are about to expire. This is further delaying the downward trend in the inflation rate. On average across the year 2022, inflation in Germany is predicted to be 8.4% as measured against the EU-wide comparable Harmonised Consumer Price Index (HCPI).”

KfW Business Cycle Compass August 2022(PDF, 139 KB, accessible)

“The only slight deterioration in sentiment is little comfort in view of the very gloomy expectations. Germany is at the beginning of a technical recession, already for the current third quarter a contraction rate is looming. The energy price-driven surge in inflation is depressing purchasing power and the uncertainties surrounding gas supplies in winter are unsettling businesses and private households alike. At the same time, the stabilising catch-up movement in services, which had previously been limited due to corona, is almost complete, and the low water levels in the Rhine are currently adding another disruptive factor. According to our new summer forecast published this morning, the German economy will shrink by 0.3% in 2023, following growth of 1.4% this year.”

“The current KfW-ifo SME Barometer reveals a broad deterioration in business sentiment in companies of all sizes and in all sectors. Above all, fears of a suspension of gas supplies due to maintenance work on the Nord Stream 1 pipeline are likely to have clouded the business outlook of many firms at the time of the survey. Although a complete stop has so far failed to materialise, the pressure on energy-intensive and consumer-oriented business sectors is nevertheless immense. Because even if gas flows from Russia continue at a low level, the threat of further losses in purchasing power will persist due to the massive increases in heating costs. Currently, the only rays of hope are the still very high order volumes in the manufacturing sector and the easing of the global supply bottlenecks revealed by some indicators. However, with a slowing global economy, the risk of cancellations is growing, and the supply crisis could be replaced by a weakness in demand.”

KfW-ifo SME Barometer July 2022(PDF, 153 KB, accessible)

“The labour market continues to prove a bulwark against the crisis. The high number of job vacancies and the employment plans of companies lead us to expect that employment will continue to rise in the coming months. This increases purchasing power and stabilises the economy. However, there is no guarantee that this will continue. If Russian natural gas deliveries were to stop completely, an economic slump and further increases in inflation could be expected - this would also affect the labour market. Unemployment has risen sharply since June due to the high number of war refugees. This draws more attention to the ability of jobseekers to integrate into the German labour market. Refugee immigration from Ukraine can strengthen the supply of skilled labour in Germany. However, a miracle will not happen. It is true that Ukrainians are relatively highly qualified: half of those who have immigrated in recent years have a university degree and another 14% have in-company training or a comparable qualification. However, according to past experience, the great potential of Ukrainian immigrants is insufficiently utilised. 30 % of Ukrainian immigrants from earlier years work as unskilled labour, compared to 6 % of Germans. And in the first two years after immigration, the employment rate was only about one third. The reasons for this are language barriers and the lack of creditability of qualifications. In the first two years after immigration, only one tenth of the immigrant Ukrainians had good or very good German language skills. For better integration of immigrants, the goal must be to significantly increase integration and qualification efforts, on the part of companies and the state, but of course also on the part of immigrants. This applies in general. Because in Germany there is a shortage of skilled workers and a great oversupply of unskilled workers.”

“The labour market continues to prove a bulwark against the crisis. The high number of job vacancies and the employment plans of companies lead us to expect that employment will continue to rise in the coming months. This increases purchasing power and stabilises the economy. However, there is no guarantee that this will continue. If Russian natural gas deliveries were to stop completely, an economic slump and further increases in inflation could be expected - this would also affect the labour market. Unemployment has risen sharply since June due to the high number of war refugees. This draws more attention to the ability of jobseekers to integrate into the German labour market. Refugee immigration from Ukraine can strengthen the supply of skilled labour in Germany. However, a miracle will not happen. It is true that Ukrainians are relatively highly qualified: half of those who have immigrated in recent years have a university degree and another 14% have in-company training or a comparable qualification. However, according to past experience, the great potential of Ukrainian immigrants is insufficiently utilised. 30 % of Ukrainian immigrants from earlier years work as unskilled labour, compared to 6 % of Germans. And in the first two years after immigration, the employment rate was only about one third. The reasons for this are language barriers and the lack of creditability of qualifications. In the first two years after immigration, only one tenth of the immigrant Ukrainians had good or very good German language skills. For better integration of immigrants, the goal must be to significantly increase integration and qualification efforts, on the part of companies and the state, but of course also on the part of immigrants. This applies in general. Because in Germany there is a shortage of skilled workers and a great oversupply of unskilled workers.”

“When looking in the rearview mirror, the euro economy was still very robust, with quarterly growth of +0.7% in the spring quarter. Looking ahead, however, it is wobbling considerably. The energy price shock has driven inflation up and consumer sentiment down, purchasing power is increasingly flowing abroad and private consumption is likely to turn from an economic driver into a burden. However, it will take time before this puts pressure on prices. In view of an inflation rate of 8.9%, the ECB should therefore follow up with further interest rate hikes at the next meetings, because the priority at the moment is to capture inflation expectations.”

“The US economy has clearly lost momentum since the beginning of the year. After two quarters of negative growth rates, the US economy has slipped into a technical recession. It is true that growth in the US economy is likely to pick up again somewhat in the current and the final quarter of the year. However, the persistently high inflation rates and the Federal Reserve's continued interest rate hikes are increasingly putting pressure on consumption. For example, the increase in retail sales in June is almost entirely due to higher prices. While the labour market is currently still robust, there are increasing signs of a slowdown in the business expectations of companies in the retail and construction sectors. If these expectations are reflected in negative business results, the situation on the labour market is likely to change.”

“In the past quarter, German economic output still got away with minor scratches, as the recovery in the once pandemic-restricted service sectors compensated for the decline in industrial production. Now, however, a recession is in the air given the crash of the Purchasing Managers' Index and the ifo Business Climate. The process of catching up in service sector activity has largely been completed, and there is a threat of additional losses in purchasing power due to massively rising heating costs, because Russian gas supplies will probably either remain sharply reduced or even stop altogether. In any case, uncertainty is huge at the moment, which is poison for investment activity. It is important to counteract this, because it is precisely investments that are needed to master the acute challenges, such as the energy transition, which has become even more urgent since the outbreak of the war.”

“The fear of a prolonged gas supply freeze in connection with the maintenance of NordStream1 in particular is likely to have clouded the business prospects of many companies at the time of the survey. Although the complete supply freeze has failed to materialize for the time being, uncertainty about energy supplies remains huge nonetheless. This is impacting business prospects in energy-intensive industries, but also in consumer-related sectors of the economy. Even if gas flows from Russia continue at the current low level, there is a threat of additional loss of purchasing power due to massive increases in heating costs. The task now is to maintain companies' willingness to invest, although in the past similarly pessimistic business expectations were usually followed by investment restraint. Only by investing can the acute challenges, such as the energy turnaround, which has become even more urgent since the outbreak of war, be mastered. This also presents opportunities for companies to position themselves in promising markets in due time.”

"The US economy may already be in a technical recession. After GDP contracted by 0.4% quarter-on-quarter in the first three months of the year, the Atlanta Fed forecasts negative growth for the second quarter as well in its flash estimate. However, the reasons for this are more technical, for example, changes in inventories play a major role. Yet the latest economic data also indicate that the U.S. economy has definitely lost momentum recently. As the labor market continues to be in very good shape, however, and inflation remains at a high level at the same time, I expect the Fed to raise the key interest rate by 75 basis points for the second time in a row at its July meeting. After that, the U.S. central bank might take the cooling economic trend into account and slow down the pace of the interest rate turnaround somewhat."

“An interest rate hike on Thursday is a done deal, and that remains the case despite the considerably gloomier economic outlook. With inflation rates above 8%, the ECB will prioritize the fight against inflation, even if the threat of a gas supply freeze means that a recession is in the air. I expect the ECB to start now with 25 basis points, as announced, and then follow up at all subsequent meetings this year. I only expect a departure from the tightening course if the situation on the labor market also deteriorates significantly. Special attention will be paid to the antifragmentation tool at this meeting. It is likely that the comments on the specific design will remain relatively vague. For all the justified efforts to achieve a uniform transmission of monetary policy, it is difficult to determine a fundamentally justified level of spreads, which is also underscored by the recent political turmoil in Italy. Arguing via the monetary policy effect is essential, however, because it is almost certain that the program will have to pass the German Constitutional Court sooner or later.”

“The innovative potential of the German SME sector remains high overall but is concentrated on fewer and fewer businesses. However, a broad increase in innovation activity across the SME sector is precisely what is crucial for the economy to continue growing. Easing the skills shortage will play a particularly important role. Furthermore, extensive incentives for building or preserving research and development capacities in businesses in the long term will have to be provided. Innovation promotion must therefore support not just pioneer enterprises but innovation across the breadth of the SME sector. This includes, for example, promoting the acquisition of strategic skills and knowledge relating to innovation management in vocational training.”

Types of SMEs in the innovation system: activities, constraints and successes(PDF, 266 KB, accessible)

"Despite all adversities, the German economy and SMEs in particular experienced a reasonably satisfactory spring. But the generally solid assessments of the current business situation contrast with very dismal business expectations since Russia’s invasion of Ukraine. Most of all, the significantly higher probability that Russia will halt its supplies of natural gas is good reason for recession fears which are being further fuelled by the inflation-related loss of purchasing power and rapid monetary tightening through interest rate reversals initiated by central banks around the world. It is now necessary to maintain businesses’ appetite for investment, because investment is the only way to meet the current challenges, such as the energy transition which has become even more urgent since the outbreak of the war."

KfW-ifo SME Barometer June 2022(PDF, 144 KB, accessible)

“Energy and commodity prices as well as supply shortages continue to shape the persistently high inflation rate in the euro area. Pressures from war- and covid- eral constraints may even intensify in the coming months. In particular, high food inflation reflects the lagged effects of high energy prices, the sharp rise in food commodity prices, but also minimum wage increases in several member states. This argues against a rapid decline in inflation and carries the risk of a wage-price spiral. The ECB's decision to lift the interest rate anchor and set course for a gradual but swift turnaround in interest rates is urgently needed in view of the high inflation. The first increase in the key interest rate in July is likely to be followed by further increases at the September, October and December meetings of the ECB Governing Council, so that the key interest rate could be around one percent by the end of the year.”

“Business sentiment is fluctuating between muted optimism and deep concern. Fears that the economy could slip into recession again are justified. Although the federal government is working flat out to replace Russian natural gas supplies, it is already clear that only less and above all more expensive gas will be available. In addition, there are increasing reports of the new, highly contagious COVID variant spreading rapidly. Should higher wage demands set off a wage-price spiral, Germany could face a multi-year period of stagflation. Notwithstanding the risky outlook, many companies are desperately seeking skilled workers. This shows how keen they are to secure qualified staff. If the German economy remains unaffected by a complete Russian natural gas supply freeze, the number of people in employment will probably continue to increase at a slower pace in the course of the year. But the growing shortage will mean that many jobs remain vacant or unfilled for a long time. On average, it now takes half a year to fill a vacancy. There are currently a high number of vacancies in health and social services, construction, hospitality, mechanical engineering, power engineering and education, among others. More than half of the jobs registered with the job centres are advertised for skilled workers with vocational training, one fifth for higher qualified experts and specialists. This is a vulnerability of the German economy that has been building for a long time. Now is the time to tackle it vigorously and mobilise all the labour force already in Germany, as well as make targeted immigration into the labour market attractive.”

“Producer prices climbed 33.6% year-on-year in May to a new historic high. There is still steam in the boiler. This is driving consumer price inflation in June as well. As in the previous month, the biggest contributions are likely to come from energy prices and food. Above all, the war in Ukraine and the pandemic or China's "no-covid" policy continue to disrupt energy supplies and supply chains. This argues against a rapid decline in inflation and poses the risk of a wage-price spiral. Collective bargaining parties in current negotiations are faced with the challenge: on the one hand, they have to compensate for the loss of purchasing power for employees, at least partially, and on the other hand, they have to limit the feedback effects on inflation. Fiscal policy can contribute to easing the situation if it cushions social hardship. The ECB must deliver with the interest rate turnaround in order to further contain inflation expectations."

“The fall in sentiment underscores: The German economy is struggling along slowly at best. Solid assessments of the current business situation are contrasted by very gloomy business expectations since the Russian invasion of Ukraine; the gap between the two components of the business climate remains enormous in June. This shows that the fear of recession is still huge and, in view of the many unknowns, is likely to dampen entrepreneurial propensity to invest. For the transformation to succeed, however, the opposite is crucial, namely a surge in investment. Unfortunately, a turn for the better can only be expected when the gun smoke from the war clears, the global material bottlenecks ease and inflation and cost pressures subside. On balance, I still expect economic growth of 1.6% this year – only about half what would have been possible without the war.”

"Last week the ECB got serious: it initiated the interest rate turnaround. Because the spreads of Southern European countries have risen significantly as a result, the ECB's Governing Council held an ad hoc meeting today. In terms of content, the ECB has stuck to its decisions from last week but the meeting has nevertheless contributed to calming the markets, at least in the short term. A look at the fundamentals also shows that the situation is different today than it was at the time of the euro crisis: although debt levels in the affected countries are higher today, the decisive factor is that the interest burden is significantly lower relative to economic output. The declining long-term inflation expectations prove that the ECB is credibly implementing the interest rate turnaround from the market's point of view. The challenge remains to counter the market fragmentation with suitable instruments.”

"US Federal Reserve Chairman Jerome Powell has recently made it very clear that the Fed will continue its aggressive monetary policy turnaround until there are clear successes in the fight against inflation. A 0.5% increase in the key interest rate for both the upcoming June and July meetings seems to already be set in stone and the tightening of monetary policy will also continue at pace. In addition to the interest rate steps, the reduction of the USD 8.5 trillion Fed balance sheet has al-ready begun. In 2022, the reduction should add up to about USD 1.0 trillion, with a further reduction of USD 1.5 trillion expected for 2023. The Fed's balancing act is to slow down the price increases and at the same time not limit the economy too much through higher interest rates. Jerome Powell has already warned in this context that the fight against inflation could become painful."

“Against the background of inflation rates that have been well above the ECB's target of 2% for months, the ECB is likely to decide at its meeting on Thursday to discontinue the APP at the beginning of July. Moreover, a consensus has increasingly emerged in the Governing Council in recent weeks that a first rate hike in the following meeting at the end of July and an exit from the negative interest rate environment by the end of Q3 is in line with the monetary policy strategy. This view is now also shared by advocates of a looser monetary policy, such as ECB Governing Council member Fabio Panetta. According to this view, the economic and monetary policy circumstances for ending bond purchases and gradually leaving the negative interest rate environment are now given. The new ECB staff forecast is likely to include a downward revision of GDP growth this year compared to March and another upward revision of the inflation forecast for this year and next. The importance of the ECB taking countermeasures is shown by the fact that inflation expectations have risen well above 2% since the beginning of the war, which increases the risk of a wage-price spiral. If the ECB reacts too late, it will be even more difficult to push inflation back to its 2% target."

“Despite all the burdens posed by the war and the pandemic, business is still relatively good, but companies are very concerned about a decline. Never before was the discrepancy so high – among both SMEs and large enterprises – between the continuing positive assessments of the current business situation and the very gloomy business outlook since the outbreak of the war. That shows the abyss into which enterprises are looking. How deep they will really fall depends on how long the spiral of sanctions and escalation will continue to turn, but also on the duration of the war. What is particularly relevant for the economy is whether gas imports from Russia will stop. Two fundamentally opposing forces are currently acting on the business cycle: While the dampening effects of the pandemic are waning, Russia’s war of aggression is prolonging and exacerbating global supply chain problems, sending energy costs soaring and weighing on purchasing power. Consumption will therefore pick up in the summer half-year, but likely at a slow pace. In the winter half of 2022/2023 the economy will even almost stagnate. Assuming a stop of Russian gas supplies can be avoided, I assume that the German economy can still grow by 1.6% in 2022.”

“The Russian war of aggression is exacerbating disruptions in international supply chains and putting a strain on purchasing power, especially due to rapidly rising energy prices. All economic analysts have therefore revised their forecasts sharply downwards. Russia's offensive military and diplomatic actions are stifling hopes that the war could come to a quick end out of economic, political and military common sense or humanitarian concerns. It is therefore all the more remarkable that the situation on the German labour market has improved significantly. The number of job vacancies has risen to a record high and employment has even increased sharply in recent months. If the feared cut-off in Russian gas supplies does not materialise, the upswing on the labour market is likely to continue. One reason for this is the full order books in industry and the construction sector, another is the shortage of skilled workers, which again increased sharply at the beginning of spring, as the KfW-ifo Skilled Labour Barometer shows. Despite the Corona crisis and the Ukraine war, skilled workers have never been in such short supply in the last 30 years. 44% of all companies complained in April that their business activities were impaired by a lack of skilled workers. The baby boomers are gradually retiring from the labour market and the cohorts that are following them in the labour market are considerably smaller. The resulting gaps are large. This already places a heavy burden on the German economy when it comes to shaking off the coronavirus crisis, dealing with the consequences of the Ukraine war and advancing the necessary investments for the climate-neutral transformation of the economy, improving digital competitiveness and curbing the housing shortage in urban areas. Therefore, we must try to mobilise all employment reserves and thus all labour forces in Germany and attract additional ones through immigration. We also need more innovation and investment to make the available workforce even more productive.”

“The persistently high inflation rate in the euro area (May: 8.1%) has once again significantly increased the pressure on the ECB to accelerate the path of the interest rate turnaround it has embarked upon. In the ECB Governing Council and among a growing number of Executive Board members, this change of course is now already indicated for July: ECB President Christine Lagarde has recently emerged as the most prominent advocate of this change of course. In a speech, she described the discontinuation of the asset purchase programme (APP) at the end of June/beginning of July, a first interest rate hike at the Governing Council meeting at the end of July and an exit from the negative interest rate environment by the end of the third quarter as being in line with the ECB's strategy. A growing consensus of this view is also indicated by the remarks of ECB Governing Council member Fabio Panetta, who is traditionally seen as more of an advocate of looser monetary policy. According to him, the economic and monetary circumstances to end the bond purchases and to gradually leave the negative interest rate environment are now given. The importance of the ECB taking countermeasures is shown by the fact that inflation expectations have risen well above 2% since the beginning of the war, which increases the risk of a wage-price spiral. If the ECB reacts too late, it will be even more difficult to push inflation back to its 2% target.”

“The once hoped-for vigorous recovery is being choked off by the war. In contrast to what was expected before Russia’s attack on Ukraine, a broad economic recovery is unlikely before the inhibiting factors subside. Because of the war, energy prices will remain high over the longer term, weighing on purchasing power. Besides, even small COVID-19 outbreaks can always create additional global supply chain disruptions because of China’s strict lockdowns. I therefore expect only moderately positive quarterly growth rates in Germany for the rest of the year, and stagflationary tendencies are also quite possible.”

“The figures from the labour market and the KfW-ifo Skilled Labour Barometer are clearly showing that it would be a mistake to only focus on commodities and inputs from abroad as bottlenecks that hamper the recovery. The skills shortage, too, has a significant impact which will likely be even more severe, particularly in the long run”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Without a response, this will significantly hamper the growth potential of the German economy already by the middle of this decade. As far as addressing the shortage, it is already five minutes past twelve because the challenges have grown significantly. The accelerated energy and mobility transition, the need to catch up in digitalisation, the growing need for skilled workers in the health and care sector as well as in the areas of childcare and education, the housing shortage in metropolitan areas, the urgent need to invest in public infrastructure and the rising number of pensioners and retirees to be cared for are creating new demand for skilled workers. Germany therefore needs to improve and systematically implement its strategy for securing the supply of skilled labour without delay in order to meet these challenges”, said Köhler-Geib. “This includes making even more effective use of the labour force potential in Germany and further opening the labour market to immigration, particularly for non-graduate skilled workers, supported by intensive language training and simplified recognition of foreign qualifications.”

“Sentiment among German companies improves and has been much more stable since the Russian invasion of Ukraine than at the beginning of the Corona crisis in spring 2020. Unfortunately, however, a rapid catch-up movement as seen from early summer 2020 is currently also out of sight, because little remains of the consumption boom expected before the outbreak of war. Because of the war, energy prices will be high for a longer period of time and thus weigh on purchasing power. In addition, it can be assumed that China's strict lockdowns will cause repeated disruptions in global supply chains, even in the case of small Corona outbreaks. The supply chains are under additional stress anyway as a result of the war. For the rest of the year, I therefore expect only moderately positive quarterly growth rates; stagflationary tendencies are also quite possible.”

“Trade tax revenues have grown considerably of late – more than expected. But the saying that not all that glitters is gold applies here as well. The Ukraine war is creating administrative and financial strain for German municipalities. The revenues of many municipalities remain fragile while they are grappling with new pressures in the form of high energy costs, refugee accommodation and continuing increases in construction prices. As was the case at the start of the coronavirus crisis, the question is how sustainable and resilient municipal budgets are in the face of these new risks.”

KfW Municipal Panel 2022(PDF, 106 KB, non-accessible)

“VC market sentiment virtually collapsed in the first quarter of 2022. This surely has something to do with the high rates of inflation and the sharp interest rate reversal announced by international central banks. Another factor is the geopolitical and economic uncertainty unleashed by the escalation of the war in Ukraine. However, we are coming down from a very high level, and the drop is less steep than the one triggered by the outbreak of the pandemic in the first quarter of 2020. This shows a state of shock over the events which is not yet reflected in broad investment activity. Around EUR 3 billion has already been invested in venture capital in German start-ups in the first three months, more than in the same quarter last year. And without mega-deals, which happen with varying degrees of frequency, we will only be just under the volume of the previous exceptional quarter. Investment activity in the VC market can be expected to remain steady, also because investors are still sitting on a lot of capital. Furthermore, the effect of the war on energy supply could even boost interest in clean and climate technology start-ups.”

“The interplay between positive and negative factors in the credit market will probably cause new lending to lose steam from the summer after solid growth in the first half-year. But the unpredictable impact of the war makes the further outlook for the credit market highly uncertain. A tightening of financing conditions is already becoming apparent, however. Against the backdrop of the war, banks will be reassessing default risks and then be more cautious in their lending. In addition, interest costs are rising again noticeably as a result of the gradual tightening of monetary policy.”

KfW Credit Market Outlook Q1 2022(PDF, 181 KB, accessible)

“After the acute shock of the war in March, business sentiment stabilised in April. But businesses are breathing only a cautious sigh of relief after the collapse in the previous month. Current events such as the war which continues to rage unabated and new disruptions to global supply chains caused by strict lockdowns in China are making economic forecasts extremely unreliable right now. Containing Russia’s aggression, effectively mitigating the social burdens from inflation and sanctions, improving energy efficiency, rapidly diversifying energy supply and preparing early and systematically for a possible new coronavirus wave in autumn are key building blocks for stabilising the economy and growth.”

"The Ukraine conflict and the supply chain bottlenecks caused by the coronavirus pandemic are currently weakening industry and the energy sector in particular. Without an energy embargo, the German economy should still grow noticeably this year. But given the major downside risks, things could turn out differently. Rising energy prices led to record inflation in March and are lowering purchasing power. Real wages are expected to fall this year as inflation remains high. In Q4 2021, collectively agreed hourly wages rose by 1.1% – with inflation at 5%. The uncertain outlook of many companies limits the possibilities for wage increases. Unemployment and short-time work have still fallen until recently. Their further development will also depend on how the infection situation develops and how many refugees come to Germany from Ukraine this year and are registered at the job centres. In the case of short-time work, a stronger increase is possible if the number of coronavirus infections rises again in autumn and the expanded short-time work allowance should be extended again. If the short-time allowance expires as planned, unemployment could rise in autumn if there was a new wave of infections leading to greater losses in turnover in the retail and hospitality sectors. Without sufficient vaccination coverage and protective measures, this risk remains for the cold months. In order to be able to integrate the refugees seeking work as quickly as possible, it is necessary to provide them with sufficient German language skills, reliable prospects of staying, rapid recognition of vocational qualifications and, where necessary, further qualifications."

"This year, the US Federal Reserve faces the balancing act of capturing record inflation with a tighter monetary policy without running the risk of stalling the economy too much. As the past shows, such a "soft landing" is an extremely delicate undertaking. In the past 60 years, the Fed has only managed to do this once. For the coming months, therefore, a fine touch is called for but first it is a matter of decisively counteracting the recent rise in inflation expectations and preventing an escalation of the wage-price spiral. After the first rate hike of 0.25 percentage points was decided at the March meeting, a clear signal from the Fed in the form of an increase of 0.5 percentage points to 0.75 to 1.0% is expected for the coming meeting. This would be the first time since 2006 that the Fed has raised the key interest rate in two consecutive meetings. Further significant rate hikes are expected in the coming months and, in addition, the Fed plans to reduce its balance sheet by $95 billion per month – twice as fast as in 2017. The US monetary authorities are taking the situation very seriously and are about to change course sharply."

"The consequences of the Russian aggression are severe for the European economy. The slightly positive growth in the euro zone at the beginning of the year can therefore only provide short-lived relief. The Ukraine war is prolonging and intensifying the headwinds for the economy and robbing the economic recovery from the pandemic much of its strength. The worsening of China’s Covid-19 outbreak adds to the burden. High energy costs and supply bottlenecks are weighing particularly heavily on the construction and manufacturing sectors. Meanwhile, consumer sentiment is plummeting, a consequence of the significant loss of purchasing power and the uncertainty caused by the war. Only the lifting of the containment measures and fiscal relief packages remain as supporting factors for economic growth."

“In April, inflation as measured by the consumer price index (CPI) of 7.4% (HICP: 7.8%) was again well above the ECB's 2% target. Compared to the previous month, however, the pace of price growth slowed down somewhat. As in previous months, the biggest contribution to the high inflation rate came from energy prices. Intensified by the war, this is reflected above all in high prices at the petrol station but also in housing costs via the costs for electricity and gas included therein. In the meantime, however, prices in other categories are also rising significantly: food in particular already rose by 6.2% in the previous month of March compared to the previous year but services also increased strongly by almost 3%. The breadth of the current inflation push is also reflected in the fact that inflation, even excluding energy and food, was almost 3.5% in March. This increases the pressure on the ECB to accelerate the interest rate turnaround compared to the previous pace. High inflation hits low-income households particularly hard, as they already spend a particularly high share of their income on food, housing and mobility. Against this background, too, a timely, appropriate monetary policy response by the ECB is indispensable.”

“The unabated raging war, new disruptions in global supply chains due to the severe lockdown in Shanghai and the highest producer price increase since the founding of the Federal Republic are a major drag on economic sentiment. Nevertheless, companies have corrected some of the shock fall from the previous month in April. This fits quite well with the current economic forecasts, which, despite downward revisions across the board, still promise solid growth of a good 2 % on average for 2022. The fact is, however, that all forecasts are currently highly uncertain. Instead, we all think better in terms of scenarios and at the same time work hard to ensure that a good scenario becomes reality! Essential building blocks for this are the containment of Russian aggression, an effective social cushioning of the inflation and sanction burdens, a rapid diversification of energy supply, but also – and this is easily forgotten in view of the horror images of the war – a consistent preparation for a new Corona wave in autumn.”

“The war in the heart of Europe is weakening the economy through a massive increase in the cost of energy and worsening bottlenecks in the supply of materials, and it is generating enormous uncertainty. Financial institutions are therefore likely to reassess default risks and readjust their lending policy.”

KfW-ifo Credit Constraint Indicator April 2022(PDF, 138 KB, accessible)

“In the March meeting, the ECB sent an important signal in the direction of price stability by maintaining its gradual tightening course despite the war. The real test is likely to come at the next meeting: Now that inflation has risen sharply again in March and there are signs that it will consolidate at a higher level in the short term, the ECB has no choice but to start tightening now. The ECB could implement this by announcing a complete end to bond purchases as early as the end of June and raising interest rates in Q3 2022 for the first time since 2014. Tighter monetary policy and higher interest rates do not fill pipelines and fiscal policy is more in demand to cushion the economic impact of the war. However, in the current inflation environment, only credible communication and decisive action by the ECB will ensure that long-term inflation expectations remain anchored.”

“As in Germany, inflation in the euro area remains high and rose significantly again in March. In the short term, prices are likely to consolidate at a high level, especially since energy prices, which had already risen sharply, have continued to rise strongly due to the Russian war of aggression. Beyond the short term, the ECB sent an important signal in the direction of price stability with its decision at the March meeting to maintain the gradual tightening course adopted in December despite the war. In the current situation, it has no choice but to start tightening now. It is true that higher interest rates do not fill pipelines, and fiscal policy is more in demand to cushion the blow. However, the ECB's actions ensure that long-term inflation expectations remain anchored. After all, these have started to move in the wake of the Russian invasion of Ukraine. In view of the extremely high level of uncertainty, the ECB's approach of proceeding gradually, thinking in scenarios and with flexibility seems to me to be appropriate for the current situation. This could also mean raising interest rates a little faster than previously planned."

“Economic expectations are currently characterised by extreme uncertainty. Speculation about the possible impact of a supply freeze of Russian natural gas and crude oil has given many companies a sense of crisis. A massive economic collapse is currently only an extreme scenario, but in any case the economic consequences of the Russian invasion of Ukraine are serious for Germany. If supplies were to be halted, scenario calculations suggest a recession, at least in industry. Without government support in the form of short-time working, a significant drop in employment in energy-intensive sectors would then have to be expected. For the economy as a whole, this could temporarily halt the rise in employment. If the supply freeze does not materialise, a muted economic recovery is likely from the spring. Unemployment could nevertheless rise slightly temporarily as a result of refugee migration and the discontinuation of extended short-time working benefits. But even without the embargo, there are serious risks. Inflation could continue to rise and become at least temporarily entrenched. In addition, a renewed upsurge in infections, hospitalisations and fatalities from omicron or new virus mutants is possible. The goal must be to reduce the high number of infections and severe illnesses. Increasing vaccination coverage must therefore continue to be a high priority. Caution must be exercised in relaxing infection protection.”

“Putin’s invasion of Ukraine is a taboo violation with dramatic humanitarian and geopolitical consequences as well as considerable risks for Germany, too. The very pronounced deterioration in SME business confidence in March was therefore foreseeable. The immediate effect of the war is first and foremost an additional surge in inflation from what is likely to be a longer-term increase in energy and commodity prices which will weigh on both household purchasing power and business activity in particularly energy and commodity-intensive sectors. But since Russia plays a secondary role as an export destination the loss of Russian demand will have less of an impact, while bottlenecks in critical commodities from Russia are potentially more severe but nearly impossible to predict. The economic impact will ultimately depend on the duration of the war and the spiral of escalation in military action and sanctions. In any case, the war and China’s new problems in containing the pandemic have stalled the momentum from the previously expected vigorous recovery.”

“As in other euro-area member states, inflation in Germany remains high and rose sharply again in March. Measured by the consumer price index (CPI), it rose to 7.3% (HICP: 7.6%) in March and could consolidate further at a high level in the coming months. As in February, energy prices are again likely to have been the main driver of this development. However, food prices, such as fresh vegetables, which had already become 11.1% more expensive in February, are also likely to have increased further. How strong inflation will be in the coming months and how long the current price pressure will last depends primarily on three factors: 1. the resilience of the German economy to sanction- and war-related disruptions of the supply chains in the wake of the Russian war of aggression against Ukraine; 2. the possibility of a gas and oil embargo including replacement and costs on the world market; 3. the speed and consistency of the ECB in implementing its chosen course of gradual monetary tightening. As long-term inflation expectations are also on the move in view of the renewed energy price increases since the beginning of the war, the ECB has no choice but to start tightening now. Its current approach of proceeding gradually on the basis of scenarios with flexibility seems to me to be appropriate in view of the enormous uncertainty caused by the war.”

“Municipalities are in catch-22 situation. On the one hand, they have to make a significant contribution to Germany’s transition to a digital, climate neutral economy and society, particularly by investing in an infrastructure that is fit for the future. On the other hand, the current environment is making such investments extremely difficult.Price increases are colliding with narrowing budgetary leeway, and municipalities can benefit from low interest rates only to a certain extent as there are limits to borrowing and the very favourable lending conditions cannot stay in place forever. This situation illustrates the need to strengthen the capacity of municipalities at a structural level, including by adding a reliable pillar that generates strong revenues to improve municipalities’ finances. Only when municipalities are able to plan activities on the back of continuous and sufficient revenues can they implement the necessary investments on a sustained basis. And only then can municipalities take up more loans to finance investment and put them to use effectively."

“Corporate sentiment collapses! Under the cannon thunder of the Russian war of aggression in Ukraine, only this one outcome was even conceivable. This war, which seems to have fallen out of time, is bringing unspeakable suffering and death to far too many people – that is as upsetting as it is clear. Far less clear, however, are the effects on the economy. They depend strongly on the duration of the war and the further turning of the spiral of military and sanctions escalation. The war will definitely take a lot of momentum out of the previously expected recovery but without necessarily leading into recession. After all, with the removal of the majority of Corona restrictions, services have considerable recovery opportunities as a counterweight to the war-related burdens, especially with a view to spring and summer. A precondition, however, is that an energy embargo against Russia is avoided.”

“Germany’s progress in digitalisation is only average. Russia’s war against Ukraine has made painfully clear how quickly abstract risks can turn into concrete threats. In the field of digitalisation, the war has exacerbated the threat situation from cyber attacks. We must be aware of how heavily dependent we are of commodities and how intensely global competition for them is evolving. Germany cannot afford any weaknesses in digitalisation. It is, rather, a building block for securing our prosperity and freedom into the future. So the fact that the coronavirus pandemic has boosted digitalisation is a good thing. More businesses have switched from emergency digitalisation measures to strategic realignment. The task of economic policy is to support businesses so that this boost turns into a sustained trend.”

KfW SME Digitalisation Report 2021(PDF, 1 MB, non-accessible)

“Before the outbreak of Russia's war of aggression on Ukraine, the situation was clear for the US Federal Reserve. Price pressures have increased across the board in the US in recent months, with inflation now at an astronomical 7.9%. Meanwhile, the US labour market continues to. In February, the unemployment rate fell to 3.8%, the lowest level since the beginning of the pandemic. The tight labour market and the danger of a faster wage-price spiral increase inflation risks. So it is high time for the Fed to react, even if the escalating conflict in Eastern Europe has also led to increased uncertainty in the USA with regard to further economic development. However, the direct economic effects are much smaller than for the euro area and so the US Federal Reserve will raise the key interest rate again for the first time on Wednesday, more than two years after the start of the pandemic. However, a large rate hike of 50 basis points seems to be off the table due to the current uncertainties, which is also confirmed by recent statements by Fed Chairman Powell, who spoke in favour of a hike of 25 basis points.”

“Despite the Russian war of aggression on Ukraine, the pressure on the ECB to continue its course of gradual tightening of its monetary policy is high. After all, in view of the renewed energy price increases since the start of the war, long-term inflation expectations have also risen noticeably. In any case, the ECB is likely to send the signal this Thursday that flexibility is the order of the day in view of the uncertainty about the economic impact on the euro area. With a view to providing liquidity to banks and financial market stability, it will convey that it is capable of acting at any time and can also react at short notice. For the new ECB staff forecast, I expect a downward revision of GDP growth this year and another upward revision of the inflation forecast for this year and next. Against this backdrop, the ECB will probably keep a firm eye on the exit from the bond-buying programmes by the end of the year and gradual interest rate steps thereafter”

“The German economy is still burdened by Omicron work stoppages, high energy and raw material prices and continuing supply chain problems but most companies expect an improvement soon and are continuing to hire. This has caused employment to rise sharply in recent months. If things continue like this – and the expected decline in new infections suggests they will – employment will return to pre-crisis levels in the spring. The same applies to the number of unemployed persons. The economic impact of the war in Ukraine and the sanctions imposed on Russia are likely to weigh on companies and private households in Germany via higher oil and gas prices. But it is unlikely that this will be enough to prevent the upturn in employment in the spring. The prospects for the labor market are therefore good in the short term, especially as dependence on Russian gas is also reduced somewhat in the warmer months. In the medium term, however, new shortages of raw materials and possibly even rationing of gas supplies also pose risks for the labor market.”

“The Russian invasion of Ukraine on 24 February 2022 marks a turning point for Europe. On the one hand, geopolitically and strategically, but also with regard to the question of how to reduce the high dependence on fossil fuels and thus on suppliers such as Russia. It is this dependence, especially on gas and crude oil imports, that has caused inflation to rise in almost all member states of the euro area during the past six months. In addition, food prices have risen significantly in recent months. This trend continued in February; measured by the harmonised consumer price index HICP, the year-on-year inflation rate was 5.8%. The Russian war of aggression is likely to continue to determine the development of gas and crude oil prices in the coming months and counteract a gradual decline in energy prices. However, it is still unclear whether they will continue to rise in the coming months or stagnate at a high level. In any case, the international sanctions will also increase the risk of new price rises. In view of the changed framework conditions, the ECB is likely to continue to pursue its current course in the coming week, leaving further options open with a steady hand. However, there are likely to be only gradual changes to its exit perspective from the expansionary monetary policy, above all a scaling back of the bond-buying programme this year and subsequent communication on the interest rate turnaround.”

“February 24, 2022 marks a turning point. Geopolitically and strategically, and also with a view to the economic policy design of our energy mix. After all, it is precisely the German economy's high dependence on fossil fuels that was one of the main reasons why consumers are now clearly feeling the effects of the inflation rates, which have been rising steadily for almost a year. This trend also continued in February, with the year-on-year inflation rate measured by the CPI consumer price index at 5.1% (HICP: 5.5%). The development of gas and crude oil prices is likely to remain decisive for the development of German consumer prices in the coming months. The Russian war of aggression in Ukraine is counteracting a gradual stabilization of energy prices and a gradual decline in the high inflation rates. Instead, the international sanctions put in place as a result of the Russian invasion of Ukraine are increasing the risk of new price rises.”

“Russia’s aggressions and the sanctions imposed in response hang over the further economic recovery of Germany and the euro area like a sword of Damocles”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “More than anything, open warfare in Ukraine is having dramatic humanitarian and geopolitical consequences, besides further driving energy prices and inflation in the euro area. This will affect Germany in a particular way as it covers around 14 % of its final energy needs with Russian natural gas alone. Besides moderately affecting economic output through loss of purchasing power it will also disrupt energy-intensive production, especially if the need arises to ration energy supplies. At this stage, the impact on German and European economic output is almost impossible to predict. Now anything can happen – from another recession to around 3 % growth."

“The rising mood in companies gives hope for an economic recovery, but the sword of Damocles of an escalating Russia-Ukraine conflict now hangs over it. The fear of war in Europe is in the air – with potentially significant effects on energy supply and energy prices, among other things. At the same time, however, February also offers good news: the peak of the Omicron wave has probably been passed without too many sharp restrictions and clear opening perspectives for the economy are emerging. Basically, I therefore see our economic picture confirmed: We expect a growth spurt from spring onwards, initially driven by consumer-related services and then increasingly by industry as well. This assumes, however, that an armed conflict remains limited to the Donbass."

“The current KfW-ifo SME Barometer illustrates that although many SMEs deplored a further deterioration in the business situation at the start of the year, they also hold a much more optimistic view of the near future again. That gives us a foretaste of spring. Overall, the Omicron wave appears to have had less of an impact than was feared in December. But work absences due to infections is still likely to cause some problems. Most of all, however, hope is growing that the pandemic situation will end in the course of the year.”

KfW-ifo SME Barometer January 2022(PDF, 141 KB, non-accessible)

“The ongoing weakness in credit demand is in line with expectations. Supply bottlenecks and the new Omicron variant have disrupted economic activity and are weighing on investment sentiment. On the other hand, higher prices for materials, inputs and investment projects are driving businesses’ financing requirements, as are new pandemic-induced liquidity gaps. Still, these effects are too small for a clear trend reversal in credit demand.”

KfW-ifo Constraint Indicator February 2022(PDF, 124 KB, non-accessible)

“At the first meeting of the ECB Governing Council in the new year, no new decisions are likely to be taken for the time being. This is mainly due to the economic uncertainty associated with the omicron option and the geopolitical tensions with Russia. The Fed and the Bank of England have already noticeably initiated monetary tightening because inflation there is driven more by rents and wages. Overall, this tightening is likely to increase the pressure on the ECB in the course of the year to consider interest rate steps earlier than previously announced. The ECB will be paying very close attention to the extent to which the high rise in energy prices spreads to other areas of the economy. It is crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account further inflation developments. The strong catch-up growth of the euro zone in 2021 points to a solid recovery. This argues for the discontinuation of all ECB purchase programs at the end of the year as an important step in the right direction.”

“The first data point of the new year shows a renewed increase in the inflation rate, which is primarily explained by the passing on of very high energy prices to consumers. Over the course of the year, the monthly inflation rate is still expected to fall. However, how quickly it does depends on how quickly supply bottlenecks and energy prices ease. The omicron option in particular makes new supply chain disruptions more likely. In any case, if there is no noticeable downward trend in the inflation rate, the pressure on wage negotiations to reach higher agreements will increase and with it the risk of second-round effects. In this case, I expect monetary policy to react earlier than currently communicated. In any case, the complete discontinuation of the ECB's purchase programs at the end of the year is an important step in the right direction. It is crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account the further development of inflation.”

"The spike in infection figures is likely to put further downward pressure on economic activity in the coming months. For the winter half-year, we expect a technical recession with two negative quarterly growth rates. In this difficult period, the labour market is once again proving to be an anchor of stability for the German economy. The experiences in South Africa and the United Kingdom give us hope that the forthcoming omicron wave will be over in a few months. With the prospect of an upturn in the spring, many companies are continuing to hire. Competition for scarce workers has intensified as a result. This should cause employee earnings to rise more strongly again and, together with the forthcoming pension increases, support overall economic demand. However, the fundamental wage restraint since the outbreak of the pandemic is likely to remain, as many companies are still feeling the financial burdens of the past two years. All in all, the signs on the labour market thus far continue to point to recovery. However, the crucial prerequisite for a sustained upturn is that we get the coronavirus pandemic under control. To do this, we need to vaccinate at full speed. The more people cooperate, the more successful this will be.”

“Following the rapid price increases in the past year, the further development of the inflation rate in Germany is subject to great uncertainty. On the one hand, the elimination of special and base effects from 2020, but also the cooling of economic activity associated with the omicron variant initially counteract a further rise in prices. This is also reflected in the data published today on the inflation rate for January, which measured by the CPI consumer price index was 4.9% (HICP: 5.1%). On the other hand, the decline has been limited by factors such as the continuing unresolved supply bottlenecks and rising energy prices, geopolitical tensions with Russia and the Chinese government's strict no-covid policy. These could continue to generate inflationary pressure in the coming months. If this persists well beyond the first quarter of 2022, the decline in inflation rates will also slow. Additional price pressure could also come from the labor market if high inflation rates continue to be reflected in higher wage settlements. In this case, I expect monetary policy to react sooner than currently communicated, for example by completely discontinuing its purchase programs as early as the end of the year. In view of all the uncertainties, it is crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account the further development of inflation.”

"The verdict of the past year is positive for the eurozone. Strong growth enabled the monetary union to loosen the grip of the pandemic and close the gap to pre-crisis levels. The key to the successful recovery was the broad-based vaccination campaigns, the fundament was the financial stabilization of households and companies achieved by the comprehensive economic policy packages. Nevertheless, economic activity will remain influenced in the short term by the ups and downs of the infection waves. However, I am optimistic that the influence of the virus continues to fade and Europe can then face the enormous challenge of transformation with all its might.”

"The real surprise came already in mid-January when the Federal Statistical Office indicated a significant decline in economic output in the autumn quarter and at the same time implicitly pointed to substantial upward revisions in the previous quarters with the annual rate of 2.7% reported at that time. In particular, licensing income from Biontech, recorded for the first time, probably shook up the growth statistics. Then, at the end of the year, the pandemic dragged the economy down again, with the hospitality industry, for example, seeing its all-important Christmas business severely curtailed. The quick release for the fourth quarter published today is also prone to revision, as data from December is still missing. For the autumn of 2020, for example, quasi-stagnation (+0.1%) was originally reported, which ultimately turned into very decent quarterly growth of +0.7%. Ultimately, however, year-end 2021 is likely to remain in the red, and a further decline is also likely in the current quarter before growth picks up again in the spring.“

"The U.S. economy grew by an annualized 6.9% in the fourth quarter. For the year 2021, this results in a GDP growth of 5.7%. Extensive fiscal spending and a very loose monetary policy have contributed to the situation that US economic output is now well above the pre-crisis level. Washington and the Fed are increasingly turning away from crisis mode in view of the good economic development. The government's fiscal support will be much smaller in 2022 than in previous years. The Fed has already begun to scale back its expansionary monetary policy. Rising interest rates and an increase in the cost of financing for companies are therefore to be expected. Economic development in 2022 will therefore be characterised by fading catch-up effects and a normalisation of the growth rate. We expect stable GDP growth of 3.8%.“

“With the first brightening of the business climate in seven months, the economic start to the new year has been successful, at least in terms of sentiment. Companies finally see light at the end of the tunnel – and rightly so! A “technical recession” in the winter half-year 2021/2022 can hardly be avoided. But the renewed pandemic-related phase of weakness should be over in the foreseeable future. A strong growth spurt is likely to follow as early as spring, driven by the recovery of consumer-related services and then increasingly by industry as the year progresses. Hopes rest on an overcoming of the pandemic in the course of the year and significantly fewer disruptions in the global supply chains.”

"The Fed, unlike the ECB, pursues a dual mandate. The Fed's mandate is to maximise employment while keeping prices stable. The US labour market is performing well, with the unemployment rate at 3.9% in December further approaching the pre-crisis level of 3.5%. This allows the Fed to focus on the fight against rising prices. The inflation rate in December was 7.0%, the highest level since 1982. To counteract this development, the Fed announced the end of the bond-buying programme in March, and in the December meeting it also signalled the prospect of three interest rate steps in 2022. Some members of the Fed's Open Market Committee have recently advocated that the first hike should take place in March. The press conference following the January meeting will probably be used to prepare this step. In addition, the reduction of the Fed's balance sheet of almost USD 9 trillion will be discussed. I think it is possible that the reduction will already begin in the summer.”

“The very high expectations placed in the German economy at the beginning of 2021 were only partially fulfilled. The exceptionally stubborn global supply chain problems, two further Corona waves and a rise in inflation that eroded purchasing power ultimately prevented a faster recovery last year. Taken on its own, the economic growth of 2.7% reported for 2021 is nevertheless respectable; since reunification it has averaged only 1.2% per year. The economic stabilisation despite new hurdles caused by the continuing smouldering pandemic is also due to the fiscal effort, as reflected in the high government deficit of 4.3% of GDP. The task now is to reduce the government debt again in perspective and at the same time channel sufficient resources into the upcoming transformation. This difficult balancing act is best achieved with solid economic growth and close monitoring of expenditure quality and efficiency. The outlook for economic growth is generally favourable, but the risks are high, especially in the short term. As in 2021, there is the threat of an economic rollercoaster ride over the peaks and valleys of new Corona waves. With the highly contagious Omicron variant, the pandemic will again cause an economic false start, but this may be followed by a strong growth spurt from the spring onwards. The prerequisite is the successful control of the pandemic – ideally its transformation into an endemic – as well as an easing of supply bottlenecks.”

“The last data point of 2021 did not bring the slowdown in price growth expected in the expert survey. The inflation rate rose for the sixth time in a row in December to now 5.0%. This year, it is to be expected that the inflation rate will fall again due to the elimination of special effects. But how fast it goes depends on overcoming supply bottlenecks and energy prices. Unfortunately, the omicron variant makes new supply chain disruptions more likely, even if a further tightening of the pandemic situation could cool price pressures somewhat for the time being. In any case, if a noticeable downward trend in the inflation rate fails to materialise, the pressure on workers to seek higher wage settlements will increase and with it the risk of second-round effects. It is therefore crucial that the ECB keeps a close eye on this development and clearly and reliably communicates the prospects for an interest rate turnaround in light of further inflation developments. The announced reduction in securities purchases was an important step in this direction and appropriate both from a monetary policy perspective and with a view to the economy, despite all the uncertainty.”

“In the year just ended, inflation has increased a lot. It has reached new heights every month since the beginning of the year, with the exception of a short pause in June. In December, the inflation rate, as measured by the consumer price index CPI at 5.3% (HICP: 5.7%), is climbing to another high point. As with mountain climbing, the question that arises when looking at inflation is whether the descent awaits after the summit or a further, hitherto unexpected rise. Both are conceivable: there is much to suggest that price growth will cool off as a result of the elimination of base effects but also due to a renewed intensification of the pandemic situation. At the same time, it remains uncertain how quickly the acute supply shortages on the energy markets and the supply bottlenecks will ease. If these persist well beyond the first quarter of 2022, the decline in inflation rates is also likely to slow. In this case, the pressure on the collective bargaining parties, which is still low due to the pandemic, will increase and could result in higher wage agreements. It is therefore crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account further inflation developments. The planned reduction in its purchasing programs was an important step in this direction and, despite all the uncertainty, appropriate both from a monetary policy perspective and with a view to the economy.”

"The labour market balance at the turn of the year is mixed. On the plus side, the labour market situation improved rapidly: Unemployment has fallen to the end of the year. At 2.3 million, the number of unemployed persons is almost 400,000 lower than in the same month of the previous year. The number of short-time workers has fallen from 6 million in April 2020 to 700,000 in October 2021. There are 800,000 job vacancies currently registered with the Federal Employment Agency, the highest number in two years. These figures are encouraging. But the recovery on the labour market is still on shaky ground. On the debit side – followed by the shortage of skilled workers – is Omicron. The new viral mutant will become another severe test for the German economy. The outlook for the economy and the labour market is therefore highly uncertain for the next few months. Many companies and jobs are still being supported with extensive subsidies. It is right for companies and jobs to be preserved for a limited period of time in a state of emergency. But the support must be phased out in good time and the companies must be able to operate under their own steam again. The overriding goal must therefore be to combat the virus on a broad front. Vaccinating as many people as possible worldwide – if necessary with adapted vaccines – holds out the only hope of ending the state of emergency in the new year."

“The Omicron variant is overshadowing the recovery in the credit market. The prerequisites for more vigorous investment and lending activity are generally fulfilled in 2022, especially on the back of the strong order volume in the manufacturing sector and continuing favourable financing conditions. Besides, investments were deferred during the pandemic, so that catch-up effects must be expected. But now Omicron has plunged us into uncertainty again, particularly with respect to the course of the recovery. At present I do not expect credit growth to speed up again until the second half of the year.”

KfW Credit Market Outlook December 2021(PDF, 128 KB, non-accessible)

“Dark clouds are gathering on the economic horizon this winter and darkening the outlook for 2022. That is the anxious message with which the KfW-ifo SME Barometer is ending the second year of the coronavirus pandemic. The Omicron variant is threatening to derail the economy yet again. What is likely is that Germany’s economic output will shrink at the beginning of 2022 because the industrial sector cannot act as a sufficient counterweight to the affected services sector for now due to persistent material bottlenecks. But with likely vaccine mandates, warmer weather and modified vaccines coming, there is reason to hope that the situation among service providers will ease in the second quarter. However, new global supply chain disruptions will also become more likely if Omicron leads to closures of production facilities or logistics hubs at major trading partners and the turnaround in the manufacturing sector is delayed. China, which will probably stick to its strict zero-COVID policy, is particularly critical in this regard. Overall, the economic dip in the winter half-year will probably be deeper than was expected just a few weeks ago, and the subsequent recovery will move at a slower pace at first.”

KfW-ifo SME Barometer December 2021(PDF, 100 KB, non-accessible)

"The mood continues to cloud over, since just as the delta wave is finally beginning to break, Omikron threatens another setback. Because of its higher transmissibility, a resurgence in new infections and hospital burden is likely to be halted only with additional containment measures. How comprehensive they must be, however, depends on many unknowns. More benign scenarios are possible. At present, however, it is more likely that German economic output will contract at the beginning of the new year, but that the upswing will then continue from spring onwards. Contact-intensive service sectors in particular, such as the hospitality sector, are likely to be hit hard again. However, global supply problems could also be prolonged if important trading partners close production facilities or logistics hubs. China in particular is critical here, as it is likely to maintain a strict zero-covid policy."

“In a hearing before the U.S. Congress, Federal Reserve Chairman Powell warned of continuing inflationary pressures and held out the prospect of increasing the speed at which the bond-buying program will be scaled back from the beginning of 2022. He is expected to officially announce this move after the upcoming December FOMC meeting. The meeting will also focus on whether the Fed will raise the key interest rate as early as next year. This prospect increases the tension for the new inflation forecasts of the U.S. central bank. These will be published at the same time. Powell had recently dropped the word "transitory" from his vocabulary with regard to price increases. In contrast to the Fed, the ECB has so far maintained its communication that the current higher price increases are a largely transitory phenomenon. However, several ECB Council members recently expressed the view that higher inflation rates are likely to be more persistent than still assumed until the summer months of 2021. The new staff forecasts, which for the first time include a data point for 2024 will be presented at the upcoming December meeting, are therefore of great interest. The medium term, i.e. 2023 and 2024, will be particularly important. If inflation rates here sustainably approach the 2% targeted by the ECB, this may result in a time window for interest rate steps and a gradual discontinuation of the purchasing programs. If the Fed holds out the prospect of interest rate steps in the coming year, the pressure on the ECB will also increase to announce the monetary policy turnaround in its communication.”

“It is encouraging that 12% of SMEs are investing in climate action, especially when we also consider that a large portion of companies have not yet invested at all. Given the scale of the challenge of the transition, however, it is clear that much more actually needs to happen here. One fourth of small and medium-sized enterprises currently have climate action on their agenda. Conversely, however, this also means that three in four companies did not complete any investment projects with a focus on climate action last year nor plan to in the foreseeable future. Given the high overall volume of expenditure required to reach the goal of climate neutrality, investment momentum needs to speed up noticeably in the SME sector as well.”

“Small and medium-sized enterprises in particular are likely to require further advice and support when developing climate action and climate change adaptation strategies. Not least, an adequate financing and support framework needs to be established for such investments. Climate action investment makes SMEs fit for the future. For one thing, businesses that take the lead on climate action have competitive advantages in the long term as carbon prices rise and customer behaviours change. For another, climate-friendly products and processes are growth markets of the future. That ensures opportunities for growth and employment.”

German SMEs invest EUR 22 billion in climate action to remain viable and competitive(PDF, 261 KB, non-accessible)

“The current KfW-ifo SME Barometer reflects a considerable downturn in business confidence. Owing to the critical pandemic situation and persistent supply bottlenecks, economic output is set to drop slightly or at best stagnate during the current quarter. Looking ahead, what matters most is how dangerous the newly detected Omicron variant is. Incidence levels are trending slightly downwards, to be sure, and the measures adopted by the most recent conference between the federal and state governments have hit most service sectors less hard than the broad lockdown last year. Should Omicron indeed be significantly more contagious than Delta and cause more severe illness even among vaccinated persons, a renewed broad shutdown in many services sectors would have to be expected. Global supply problems could also intensify if major trading partners end up closing production facilities or logistics hubs. China, which will continue its strict zero-COVID policy, is particularly critical in this regard.”

KfW-ifo SME Barometer November 2021(PDF, 145 KB, non-accessible)

“Part of the growth will shift to next year, and Germany’s gross domestic product will remain slightly below the pre-crisis level of the final quarter of 2019, by a good one per cent. But as the saying goes, all is not lost that is delayed. The German economy will grow above its pre-crisis level in the second quarter of 2022 – and it will do so quite quickly and noticeably once the inhibiting factors are resolved.”

“As this enormous order backlog is reduced, a new growth surge is foreseeable in the course of 2022 as soon as the material shortages ease. Once the fourth wave of the pandemic has been contained, consumption demand will also pick up again in the course of 2022, especially since private households have considerable excess savings which will also allow them to at least mitigate losses in purchasing power due to higher energy prices. From the first quarter of 2020 to the third quarter of 2021, the domestic savings ratio averaged 5.8 percentage points above the average of the previous ten years, which amounts to combined excess savings of EUR 208 billion or 6.2% of GDP of 2020.”

KfW Business Cycle Compass November 2021(PDF, 90 KB, non-accessible)

"Supply and material bottlenecks have put the brakes on the upswing for the time being and the number of people infected with Corona has again soared to a worrying level. In view of these setbacks, all economic analysts have revised their forecasts for the current year significantly downward. Despite the subdued expectations, there is one bright spot: The German economy is on the road to recovery. This is particularly evident on the labour market: Companies are hiring more again. Companies looking for workers have reported more than 800,000 vacancies to the Federal Employment Agency. This means that the number of vacancies has almost reached a record level. Despite the economic uncertainty, I therefore expect unemployment to fall further in the coming months. The shortage of skilled workers is particularly serious. In October, 43% of the companies surveyed in the KfW-ifo Skilled Workers Barometer reported that their business activities were hampered by a lack of skilled workers. This is the highest level to date. In industry, never since reunification have so many companies seen themselves hampered by a shortage of skilled workers as at present. This clearly shows that the shortage of skilled workers is becoming a problem that business and politics urgently need to pay more attention to."

“Measured by the consumer price index (CPI), inflation was 5.2% year-on-year (HICP: 6.0%). The last time there was an increase of this magnitude was during the reunification boom in 1992. However, the situation at that time was different. At present, between 1.3 and 1.5 percentage points of the increase in November alone are likely to be due to the reverse base effect of temporary VAT cuts and changes in the weights in the basket of goods. These effects drop out of price measurement at the start of the new year, which will dampen the rate of inflation from January. In addition, the sharp rise in energy prices over the past few months and the as yet unresolved difficulties in the supply chains are driving inflation up further. For the coming year, however, I see light at the end of the tunnel. It is very likely that inflation will gradually decline and fall below the 2% mark again in the middle of the year. With regard to monetary policy, a steady hand is called for. Against the background of the predominantly temporary and also supply-side effects, short-term tightening measures would, on the one hand, fizzle out. On the other, they could hamper the still incomplete economic recovery in Germany and the euro zone. However, I believe it is crucial that the ECB keeps an eye on the turnaround in interest rates, communicates this and pursues it consistently, taking into account the further development of inflation. In this way, it can continue to ensure monetary dominance.”

“The decline in the ifo business climate was expected in view of the rapid increase in the number of infections. The pandemic development is particularly depressing because it will lead to a new peak occupancy rate in intensive care units, which a higher vaccination rate would have easily avoided. For some businesses, however, such as those in the catering or event industry, the foreseeable loss of turnover is also painful. Although politicians would like to avoid general shutdowns at all costs, some virologists warn that in many places an extreme overload of the health system can only be prevented with general contact restrictions and the closure of nightlife. A look at Austria also shows that far-reaching lockdowns are again possible as a last resort. After all, there is now a chance that a third vaccination could contribute to a significant easing of the pandemic situation this winter. For this to happen, however, politicians must ensure a massive expansion of vaccination opportunities as soon as possible.”

“The current KfW-ifo Skilled Labour Barometer shows that the German economy is dealing with more than just material shortages and supply bottlenecks. The skills shortage is hampering businesses to a far greater extent than before the crisis. The lack of skilled personnel is threatening the further recovery and growth in the coming years. What direction the skills shortage takes will crucially depend on whether and to what extent the participation of Germans in the labour force and skilled migration grows again and to what extent skilled personnel can be qualified in line with demand through training and education.”

KfW-ifo Skilled Labour Barometer 4th quarter 2021(PDF, 131 KB, non-accessible)

“The currently steady SME business sentiment brings a small ray of hope to the otherwise rather dim economic outlook at the beginning of the autumn quarter. But the rapid rise in new infections since the end of October shows that the pandemic continues to bite in Germany as well.” With the arrival of the cold season people are moving indoors again, which increases infection risks. Contact-intensive service businesses could suffer if consumers choose to stay away. “The persistent material bottlenecks and fast rising energy prices, particularly since late summer, are affecting SMEs to a similar degree as large enterprises”, added Köhler-Geib. “But even if materials and inputs are anticipated to remain in tight supply for some time to come, any improvement to the supply situation can generate growth. After a dip in economic activity in the winter half-year, I expect a new growth surge in the course of 2022 as soon as the supply-side disruptions subside.”

KfW-ifo SME Barometer October 2021(PDF, 147 KB, non-accessible)

„In September, the US inflation rate showed for the fifth time in a row a five before the decimal point. Although the Fed continues to point to temporary effects, the US monetary watchdogs have also observed that there have recently been significant price increases in cyclical components as well. The Fed is despite the recent weaker-than-expected labour market recovery under increasing pressure to initiate a turnaround in monetary policy. It is therefore expected that the monetary watchdogs will decide to reduce bond purchases at their November meeting. So far, the US central bank has been buying bonds worth USD 120 billion per month. The FOMC meeting minutes from the September meeting indicate that a monthly reduction of USD 10 billion in government bond purchases and USD 5 billion in mortgage bond purchases can be expected. At this pace, the bond-buying programme would end in June 2022. I expect the first interest rate step towards the end of 2022.”

“The summer brought strong quarterly growth of +1.8%, especially as people again went out to restaurants or to cultural and sporting events, for example, or used personal services or travelled more frequently after most Corona-related restrictions were lifted. However, without the stubborn material bottlenecks that restricted the producing sector in particular, the growth in economic output could have been even higher. Unfortunately, the supply-side distortions will probably only ease next year. At the same time, the catch-up movement in consumption loses momentum with the onset of the cold season, also because many people are likely to voluntarily limit their demand for contact-intensive services in view of continuing infection risks. Added to this is the steep rise in energy prices, which reduces real purchasing power and creates cost pressure on the corporate side. Therefore, I expect quarterly growth to be much weaker in the final quarter of 2021. But the recovery is only postponed, not cancelled. With record industrial order books and exceptionally high household savings, I expect a strong growth spurt in the course of 2022 once the supply-side dislocations subside. What we will see in autumn and winter is just a dip in the economic cycle!”

“The strong comeback of services has given a powerful boost to economic output in the euro area. At the same time, disrupted supply chains in the industrial sector have weighed less on production than in Germany. As a result, the precrisis level is within reach. However, with the lifting of most Corona measures, the potential for rapid improvements in the economic situation has now been exhausted. At the same time, the recovery is being held back by an unpleasant combination of rapidly rising energy prices, persistent shortages and local waves of infection of varying severity. A year-end spurt in growth will therefore fail to materialise.”

“The labour market has so far proved resistant to the production downturns in industry and the construction sector. But the risks to the further upturn are considerable: Thus far, it has been difficult to predict how long the material bottlenecks and production disruptions on the world markets will last. The resulting supply difficulties and sharp price increases for key raw materials and intermediate goods are delaying the emergence from the crisis. The further recovery will therefore be more sluggish than expected in the spring. But postponed does not mean cancelled. Due to pent-up demand following the crisis-related production losses, the order books in industry are well filed. In residential construction, too, order backlogs are at a historically high level due to the high demand for new buildings in conurbations. This means that high production increases can be expected as soon as the bottlenecks are overcome. If the situation eases by the end of the year, unemployment could fall further in the coming winter, at least on a seasonally adjusted basis.”

“Measured by the consumer price index (CPI), inflation was 4.5% year-on-year (HICP: 4.6%). A significant part of the increase in recent months is mainly due to the economic aftermath of the pandemic and will recede in the coming year. However, there are currently also upside risks emanating from the supply side. The overall picture is made up of various influencing factors: First, statistical base and special effects, for example from the oil price or the German VAT cut in H2 2020, only affect price measurement until the end of 2021. This dampens the inflation rate from 2022. Second, the current supply bottlenecks. Here there is uncertainty as to how long they will remain an additional, price-driving factor in the industry. If they persist well into 2022, this is likely to have a negative impact on economic growth and will also be felt in consumers' wallets. Thirdly, supply-side effects are likely to keep energy prices high over the winter, pushing inflation towards 5% in the last two months of the year. For 2022, I expect inflation to gradually decline and fall below the 2% mark again in the middle of the year. Against the backdrop of both temporary and supply-side effects, short-term tightening measures with a view to inflation would fizzle out. However, I believe it is crucial that the ECB keeps an eye on the interest rate turnaround in the medium term and follows it up.”

“After double-digit growth rates at the beginning of this year, growth in the broad monetary aggregate M3 in the euro area is falling back to a level similar to that at the start of the pandemic (7.4%). Growth rates are also likely to remain in single digits in the coming months, especially after the ECB announced at its September meeting that it would buy "significantly less" in Q4 than in the two preceding quarters. This will have little impact on the currently heightened inflationary pressure: For one thing, price increases are largely driven by supply-side factors which are beyond the control of the central bank. For another, M3 growth remains well above the average of the pre-crisis years. More housing loans and government bonds on bank balance sheets are primarily responsible for this development, while growth in corporate loans plays only a minor role after strong contributions at the beginning of the pandemic.”

“In light of the crisis, it is understandable that SMEs are reluctant to invest. That needs to change urgently. The transformation to a climate-neutral and sustainable economy is on the agenda, and many businesses have much catching up to do in digitalising operations. In order to manage this, they will have to show the same strengths that have brought them through the crisis. Policymakers have to provide a reliable economic policy framework and give them targeted support in carrying out necessary investments.”

KfW SME Panel 2021(PDF, 873 KB, non-accessible)

“The economy is taking a dip, as evidenced by the increasingly cool mood among companies. After a strong increase in the summer, quarterly growth will be much weaker in the autumn. Key risk factors have become reality: material bottlenecks and disruptions in the global transport system have been a burden for longer than originally expected and will probably only ease in the coming year. Added to this is the recent sharp increase in energy prices, which is reducing real purchasing power and creating additional cost pressure in companies. With the onset of the cold season, life is also shifting more indoors again, which is why more cautious people may voluntarily hold back on contact-intensive services in view of the ongoing pandemic. But the recovery is only postponed. The backlog of industrial orders is at a record high and private households have saved an unusual amount of money during the pandemic. I therefore expect a strong growth spurt in the course of 2022 once the supply-side disruptions subside.”

“I expect below-average credit demand to continue in the months ahead. The economic recovery and government subsidy payments of now more than EUR 50 billion have improved companies’ financial position. Businesses also deposited unusually large amounts in bank accounts during the coronavirus crisis. Companies can use this liquidity for upcoming financing requirements, for example for investment expenditure. On the supply side, I see little scope for improving credit access. The persistent disruptions to global supply chains and the steep rise in energy costs are relevant risk factors which financial institutions are likely to be increasingly mindful of in their lending decisions.”

KfW-ifo Constraint Indicator October 2021(PDF, 111 KB, non-accessible)

“Subject to all the imponderables which the pandemic has brought with it, I expect business lending to now emerge from the trough. The drivers for this will be both the disappearance of the negative base effect in the second half of the year and the rebound of business expenditure – even if it is still slightly below the pre-crisis level – around 1.5%. Sooner or later, the financing requirements resulting from business investment will translate into stronger new lending activity. The banks themselves expect a rebound in credit demand in the third quarter compared with the preceding three-month period. But it will take a bit more time for the annual growth rate of new lending to turn positive again. I believe this should be the case in early 2022.”

KfW Credit Market Outlook September 2021(PDF, 119 KB, non-accessible)

“We need considerably higher IT and digitalisation investment into the future, and that means now. The penetration of information technologies into business and society is not a completely new trend, but the current digitalisation wave is a far-reaching process that is not only sweeping through individual sectors but leading to profound changes in business and society. Digitalisation is the main driver of future economic growth and increasing prosperity. New software developments are also becoming more and more important in areas that have traditionally been our strengths, such as the automotive industry as well as production, environmental and climate technologies. That makes digitalisation a beacon of hope for enhancing the competitiveness of broad sections of the economy and for a return to higher productivity rates. Germany must do more here to catch up with other countries again.”

Digitalisation in international comparison: Germany lags far behing in IT investment(PDF, 197 KB, non-accessible)

“Supply bottlenecks have placed enormous obstacles in the way of small and medium-sized enterprises as they emerge from the coronavirus crisis. Manufacturers and construction firms are suffering the most, but so are wholesalers, retailers and service providers. This is sapping the momentum from the economic recovery that has only just started. Economic growth is likely to flatten in the coming months but will remain positive. The supply bottlenecks will take time to dissipate, but I expect the material shortages to ease at least a little in the course of the coming months. Catch-up effects can then provide impetus for a new growth spurt next year."

Supply bottlenecks are significantly impacting all areas of the SME sector(PDF, 165 KB, non-accessible)

“Germany will have to invest around EUR 5 trillion to achieve climate neutrality by the middle of the century. That is a massive amount, but it is doable. In order for us to meet this challenge, public investment funds must be used in a targeted manner, and private investment must be mobilised. This offers the opportunity to make Germany more competitive and prosperous and enable it to emerge stronger from the transition. The high investment requirements and the management of the associated risks place equally high demands on the financial markets and the real economy, because we need smart and diverse financing tools to fund the transition. But I am convinced that if we join forces we will be able to successfully position Germany for a climate-neutral age.”

Investing EUR 5 trillion to reach climate neutrality – a surmountable challenge(PDF, 270 KB, non-accessible)

“Much indicates that globalisation will continue to move forward at a slow pace after the coronavirus crisis has been overcome. Businesses are well advised to consider such a possible trend and think about alternative growth strategies.

It is important to ensure reliable frameworks for external trade and to return to a more rules-based trade system. Entering into new trade agreements with booming emerging and developing economies, further liberalising trade in services and creating a digital EU internal market can contribute significantly to strengthening international trade.”

Globalisation in crisis

“The last yards are the most difficult. The KfW-ifo SME Barometer shows that the same goes for the pathway of Germany’s small and medium-sized enterprises out of the coronavirus crisis. Shortages of materials, inputs and freight capacity, in particular, have already slowed production for the past months and could also increasingly weigh on trade. Given the multitude of disruptive forces, however, it is difficult to predict when the supply situation will improve. Service businesses are mainly keeping a close eye on infection rates, which were falling during the survey period. Even if infection rates will presumably rise in the autumn, the use of vaccination certificates, tests and face coverings makes broader shutdowns unlikely. All in all, aggregate economic growth is likely to flatten in the coming months but remain positive. In addition, pent-up demand in the manufacturing sector also provides potential for a growth surge when the current supply chain bottlenecks gradually ease. But that will probably not be the case until sometime next year."

KfW-ifo SME Barometer September 2021(PDF, 96 KB, non-accessible)

“Consumer prices in Germany continued to pick up speed at the end of the third quarter. Measured by the consumer price index (CPI), inflation was 4.1% year-on-year (HICP: 4.1%). The current increase is still strongly determined by the recovery in the price of crude oil and the special VAT effect. These effects will disappear in the new year. However, energy prices are currently also rising for other reasons: For example, there are shortages of coal and natural gas and supply problems on the part of Russia and Norway. In addition, the cold past winter has emptied stocks, and wind energy is suffering a weather-related lull. As a result, energy prices are likely to remain high until the end of the year, with gas and electricity components pushing them up sharply. This should keep headline inflation well above 3% for the rest of the year, before slowly falling back below 2% in mid-2022. Supply bottlenecks in industry remain an additional factor. If these last longer than expected, this is likely to impact economic growth and be felt in consumers' wallets. A good leading indicator for future consumer price developments are wholesale prices, which have recently risen significantly and will be passed on to consumers sooner or later.”

“The coronavirus crisis made an imprint on start-ups in 2020, to be sure, but after this exceptional year we expect the start-up scene to develop just as fast as it did in previous years.”

“Female entrepreneurial activity continues to be influenced by gender stereotypes. These ultimately lead to a smaller share of female start-up entrepreneurs. It would be good for the German start-up ecosystem and VC industry to become more female. After all, Germany cannot afford to squander away innovation potential. Role models that keep women from starting a business are an obstacle. It is important that highly qualified start-up teams emerge irrespective of gender and origin and find the best possible conditions for financing, growth and success. In order for this to happen, gender stereotypes must be overcome and role models strengthened as multipliers.”

KfW Start-up Report 2021(PDF, 612 KB, non-accessible)

“At the turn of the year, broad money M3 in the euro area had been growing at double-digit rates. The phase of very strong money supply expansion may be over. Nevertheless, money supply growth in August was significantly above the pre-crisis level of around 5%. Housing loans and more government bonds on bank balance sheets are driving this development. Growth in corporate loans, on the other hand, is now making only a minor contribution. This is unlikely to change much in the short term. As the economy recovers, the financial situation of companies is improving; moreover, they built up exceptionally high bank deposits during the Corona crisis. Companies can now use this liquidity stock as uncertainty recedes - in the best case for investment.”

“The last metres are the hardest. This also applies to the German economy's return to pre-crisis levels, as the decline in the ifo index underscores. In particular, bottlenecks in materials, intermediate products and freight capacities have been slowing down production for months and are increasingly impacting retailers as well. Due to the variety of disruptive factors, it is unfortunately currently very difficult to estimate when there will be an improvement on the supply side. Particularly as the strict "zero-covid" policy in China is constantly threatening new disruptions in the supply chains. For the service sectors particularly affected by the pandemic, however, the recent decline in infection figures in Germany is a good sign. The number of infections is likely to rise again in the fall or winter. But with vaccinations, tests and masks, blanket shutdowns at least remain unlikely.”

„The inflation rate in the USA fell in August from 5.4 to 5.3%. The peak of price increases is most likely behind us but the inflation rate will probably remain above the Federal Reserve's two percent target well into next year. At the same time, the labour market data for August were much weaker than expected and the full extent of the economic impact of the fourth coronavirus wave is still difficult to assess. The Fed faces the difficult task of balancing these factors. At the annual meeting of central bankers in Jackson Hole in late August, Jerome Powell announced that the Fed will probably begin to reduce its bond purchases this year. Observers are keen to see whether the Fed will announce a precise tapering schedule at its September meeting next week. However, I assume that the US monetary watchdogs want to observe the economic development a little longer and therefore expect a final decision at the next central bank meeting in November.”

“The coronavirus crisis and the resulting drop in training activity are contributing to the fact that SMEs’ efforts to improve their workforce’s digital skills have stalled. That is bad news because we are in the midst of a structural digital transformation. Investments of the future require digital expertise. It is therefore crucial for businesses, the workforce and the overall economy to rapidly expand training activities. Enterprises that have been hit by the coronavirus crisis in particular need advisory services and financial support for in-company training. Increasingly diverse career biographies make it equally important to promote individual continuing professional development. The guiding principle is self-directed lifelong learning – but not in isolation. A further education campaign could improve productivity and competitiveness already in the short term. In the long term, digital skills must be given greater importance in schools and daycare centres.”

German SMEs lack digital skills, need more training(PDF, 219 KB, non-accessible)

“The all-important question for monetary policy at present is whether the current inflationary pressure is temporary or is likely to persist in the longer term. Against this backdrop, the future of the PEPP program will be the subject of intense debate at the upcoming meeting of the ECB Governing Council. Although the Council members are likely to agree in principle that temporary factors are currently predominant with regard to inflation and in the new staff projections inflation will certainly be below 2% again in the coming years. The hawks among the Council members will emphasise the upside risks to price developments. Moreover, with the rather strong recovery of the euro economy in the second and probably also the third quarter, the justification for the crisis instrument PEPP becomes more difficult. Yet uncertainty about the further development of the economy is high. That is why I expect concrete decisions on the future design of the securities purchase programmes only in December. In addition, the ECB will probably leave itself a lot of flexibility for the purchase volume in the coming months.”

“Companies in Germany are hiring again. This is clearly reflected in the increased number of job applications. 779,000 vacancies were reported by companies to the employment agencies in August, 195,000 more than a year earlier. It is true that production has declined in recent months due to supply bottlenecks in the manufacturing and construction sectors. But the special factors that led to the supply bottlenecks will gradually dissipate in the coming months, as industry insiders also expect. In addition, the order situation in industry and construction remains very good. Both of these factors suggest that the shortage of materials will have little impact on the upswing in the labour market. According to current information, a higher risk is posed by the rapid resurgence of infection figures, which raises fears of a major fourth wave of infections in the autumn. In order to avoid another economic setback, the top priority must therefore be to resolutely continue to contain the pandemic, above all by further increasing the vaccination rate. It is important to convince as many unvaccinated people as possible how sensible and important vaccination against the Corona virus is. Vaccination is not only a question of protecting oneself from the virus. It is also a question of social responsibility. Because many lives, jobs, entrepreneurial livelihoods and the economic future are at stake, not only in Germany, but worldwide.”

“Consumer prices in Germany continued to rise in August. Measured by the consumer price index (CPI), inflation was 3.9% higher than a year earlier (HICP: 3.4%). Energy prices remain the main driver, but food and services, which have benefited strongly from the openings of recent months, are also responsible for the renewed increase. In the case of groceries, the VAT base effect is also likely to be a factor, as the retail sector mostly passed on the reduced rates to consumers last year. One indication that the current increase is likely to remain temporary is the core inflation. Prices of goods less susceptible to fluctuations have risen much more slowly in recent months than energy and food prices, for example. Therefore, the ECB's rather cautious forecast, from today's perspective, of an inflation rate below the 2% target again from 2022 and thereafter seems quite plausible. However, if the supply bottlenecks in industry persist for longer than expected, this is likely to have an impact on consumers' wallets, as companies are likely to pass on the higher costs at least partially to consumers. The recent sharp rise in producer prices could be a first indication in this direction."

"The US is suffering a fourth wave of the COVID-19 pandemic. The seven-day average of new infections is about to exceed the 150,000 mark, a value last reached in January. The fact that the rising number of cases is also once again increasingly influencing everyday life can be seen at the annual central bank meeting in Jackson Hole, which was switched to a viral format at short notice. However, this does not diminish the excitement with which people are waiting for US Federal Reserve Chairman Jerome Powell's speech. The US inflation rate will remain above the Fed's target of 2% in the coming months and the recovery on the labour market has recently picked up speed. So everything is actually in place for a gradual turnaround in monetary policy. However, the Fed is certainly concerned about the rising Corona case numbers and the associated economic uncertainties. A different weighting of these factors explains the divided opinion in the Fed Committee in the run-up to the symposium. So it's worth watching closely to see whether Powell will give the first hints of a reduction in Fed bond purchases during his speech on Friday."

"European corporate credit growth all but stabilized at a low level in July. The chances are good that, unlike in the financial and euro crisis, investment-damaging deleveraging will be avoided this time. In addition to the economic recovery, the highly expansionary monetary policy is also contributing here. This gives companies the financial scope to invest more in fixed assets and innovations again. Nevertheless, the increased indebtedness of European companies will remain a risk to growth and the economy for some time to come, which may materialize when government support comes to an end."

“It's summer, but clouds keep interrupting the sunshine – and that's exactly what's happening to the German economy at the moment. Households have an unusually large amount of money in their pockets following the lockdowns and are now once again demanding long-desired services, for example in the hospitality sector. This has been made possible above all by the significant progress made with vaccinations. At the same time, however, supply bottlenecks in industry and construction are proving more stubborn than initially expected and are dampening production despite good demand. In economic terms, the clouds are once again prevailing, with the business climate falling for a second time in August following the setback in July. This expectation-driven decline is fitting, as there is only limited scope for further upward movement. Supply bottlenecks will only ease gradually, and with the fourth wave due to the contagious delta variant looming, pandemic-related worries are once again on the rise. We have therefore revised our GDP forecast for 2021 slightly downward to 3.0%.”

“Growth is back, but the upward trend is not endless. Powerful growth impulses are coming from the service sector, which got off to a lively start to the summer quarter. On the other hand, manufacturing industry is not expected to make a significant contribution to growth before the end of the year. Until then, the shortage of supplies of materials and inputs will dampen industrial production in particular, but also the construction sector.”

“Two mega deals each worth around USD 1 billion have pushed the German VC market to a new level in the second quarter; sentiment exceeds anything we have seen so far. Alone the increased entry evaluations are a fly in the ointment for many investors, but they have had no significant influence on business sentiment to date. The development in deal volumes indicates that the assessments have risen primarily in follow-on financing rounds and less in the context of seed financing. This can also be viewed as a success in the sense that more confidence is now placed in German start-ups that have ‘established’ themselves.”

Business climate indexes for the German venture capital market Q2 2021

“The coronavirus crisis could go down in history as a catalyst for change in the medium-sized enterprise sector. For some SMEs, the changes in consumer behaviour due to the pandemic will lead to a long-term fall in demand. For the companies affected, adjustments are likely to be unavoidable. The task is to support this sometimes difficult transformation process with appropriate promotional measures and training for employees. If this succeeds, SMEs as a whole could well emerge stronger from the crisis. Even more so since many of them will also benefit from the changes in consumer behaviour and in future enjoy higher levels of demand for their products and services.”

No way back: Many SMEs expect the coronavirus crisis to have a lasting impact on product demand(PDF, 158 KB, non-accessible)

“Successful digital transformation in the business community is of enormous importance for Germany’s future competitiveness. Germany aims to become climate-neutral by 2045, so the drive to digitalisation must take climate change concerns into consideration from the start. This requires policy guidelines for harnessing the opportunities of digitalisation – for example, incentives for the automated flexibilisation of electricity demand in line with supply fluctuations of wind and solar power. In addition, market incentives for reducing greenhouse gas emissions driven by digital technologies are also still too weak.”

The trade-offs between digitalisation and climate action: Why digitalisation must be sustainable(PDF, 203 KB, non-accessible)

“The business situation among SMEs is good, but in terms of business expectations optimism is declining. The newly increasing incidence rates in particular are causing concern among service providers, as it is still not clear how policymakers are going to react. If we keep up our efforts in the areas of vaccinations, tests and face coverings, it should be possible to avoid across-the-board closures among businesses, hotels and restaurants. The rate at which businesses continue to open up is likely to slow. Materials bottlenecks have been plaguing the manufacturing sector since the beginning of the year, and industrial production has tended to fall. Overflowing order books are evidently more important for the situation assessment. Nevertheless, the businesses that have already opened in the services sector combined with consumer catch-up purchases are probably sufficient to ensure solid growth in the current quarter. How things pan out in autumn depends especially on the progress made on the vaccination front in the coming months. Turning to the economy and society as a whole, I can only say: ‘Vaccinate, vaccinate, vaccinate!’”

KfW-ifo SME Barometer July 2021(PDF, 94 KB, non-accessible)

„Growth is back. After the difficult winter half-year, the euro zone is again on the road to recovery. The rapid openings in May and June have benefited the beleaguered service sectors in particular. With this tailwind and excellent sentiment figures, the European economy is starting the summer quarter. The conditions for further decent increases in GDP are thus good, even if the recovery may lose some momentum due to supply problems and the highly contagious Delta virus. For countries heavily dependent on tourism in particular, the rapid development of new infections in the middle of the peak season comes at an inopportune time. However, unlike last year, a high vaccination rate can limit the health and economic consequences of new waves of infection. Efforts to increase vaccination rates are thus rightly moving to the center of pandemic response."

„While manufacturing disappointed, the music was playing in the service sectors last quarter, with a sharp recovery after the lifting of prolonged pandemic restrictions. After new Covid restrictions took effect in April, infection figures fell rapidly from May onwards, making many openings possible, which were gratefully embraced by consumers. In manufacturing, on the other hand, there is a shortage of materials, which is why bulging order books cannot be worked off. In the current summer quarter, the persistent supply bottlenecks remain a brake on growth. However, the renewed sharp rise in the number of infections in Germany has also dampened the outlook for the critical service sectors somewhat. The pace of further openings is likely to be curbed, but with the systematic deployment of vaccinations, tests and masks, blanket closures of stores, hotels or restaurants should now be avoidable. The momentum of recent months alone is likely to result in solid growth in the current quarter. How things progress in the winter will then be decided in particular by the progress of vaccination over the next few months.”

“Consumer prices in Germany rose again in July, measured by the consumer price index (CPI) by 3.8% year-on-year (HICP: 3.1%). Prices in Germany thus rose as strongly in July as they last did in the summer of 2008. However, the following classification is crucial here: It is true that prices in the areas benefiting particularly strongly from the openings rose significantly, as consumers can now finally catch up on what they had to do without during the lockdown phases. In addition, producer prices rose by 8.5% in June, the highest rate since the second oil crisis in 1982, which will sooner or later be felt in consumers' wallets. However, the higher producer prices are also mainly due to base effects of the economic recovery, such as higher energy and raw material prices. In addition, the special effect of the return to the original VAT rates compared with the previous year will take effect from this month. This effect is likely to be the main driver of inflation until the end of the year. As early as 2022, however, inflation is likely to be slightly below the ECB's new symmetrical inflation target of 2% again, as the above-mentioned base and special effects will then no longer be measured.”

“The economy and the labour market have put on their seven-league boots and are rushing ahead with great strides. This is the long-awaited breakthrough - at least for the time being. Euphoria would be exaggerated, because although the uncertainty surrounding the further course of the pandemic is receding, its effects are still serious. In May, 2.2 million employees were still working short-time. If the number of infections and hospital admissions were to skyrocket again, it might be necessary to restrict the freedoms that have been gained. Meanwhile, another difficulty is looming on the labour market: if fewer workers migrate to Germany due to travel restrictions and fear of infection, the shortage of skilled workers will restrict companies even more than before the crisis. If the upswing continues as clearly as it has, the lack of skilled workers will then hinder more than a third of all companies in their business activities next year. This will dampen the urgently needed growth. In the following years, demographics will further exacerbate the problem. In view of this perspective, we consider it necessary to accelerate the weak growth of labour productivity in Germany. If this is to succeed effectively, a comprehensive economic policy strategy is needed to address the deficit in investment and innovation and also to advance digitalisation through education and qualification. Action is urgently needed here.”

“For growth and employment, innovation and digitalisation are two sides of the same coin. Digital technologies often form the basis for innovation. On the other hand, it is particularly the innovative enterprises that drive digitalisation forward. The fact that ever fewer SMEs are innovating is therefore cause for concern, since progress in the digitalisation of SMEs will also slow down without a broad basis of small and medium-sized innovators."

Innovation and digitalisation in enterprises mutually reinforce each other(PDF, 216 KB, non-accessible)

“The easing of the Corona measures is reviving the US economy and causing prices to rise further. Inflation climbed to 5.4% year-on-year in June and core inflation also increased further to 4.5 %. Short-term inflation expectations have also continued to rise significantly, increasing the gap with long-term inflation expectations. Against this background, the differing assessments of the members of the Federal Open Market Committee (FOMC) as to how quickly the tightening of the monetary policy stance is required can be explained. As a result, this week's Fed meeting is unlikely to bring about any significant changes in the Fed's monetary policy stance. Only on the basis of a new set of data do I expect announcements on changes in the securities purchase programmes at the annual central bank conference in Jackson Hole at the end of August.”

"Growth in corporate lending remains meagre in June. However, the development is better than it appears at first glance. Indeed, the weak growth now is to a large extent due to the rapid increase in loan books over the past year. In addition, there are initial signals that lending to companies could soon pick up again. European banks are already observing a rise in demand for bank financing. Particularly positive: for the first time since summer 2019, institutions are reporting higher needs for investment loans. This is of great importance, as a boost in private investment is necessary for a stable recovery path of the European economy after the expiration of economic policy support."

“Even though the business climate slipped in July, the ifo business survey still indicates a good business situation in the economy. Thanks to low Covid-incidences and renewed appetite for consumption, sectors particularly affected by the pandemic, such as the hospitality sector, are enjoying the longed-for recovery. Manufacturing and construction are struggling due to material bottlenecks, but more important are the bursting order books. Unfortunately, however, Germany is not yet out of the woods in the pandemic. The delta variant is spreading rapidly and, at this pace, will generate high infection figures again in just a few weeks. It is still unclear how politicians will deal with this. With the consistent use of vaccinations, tests and masks, blanket closures of stores, hotels or restaurants should be avoidable. However, the pace of further openings is likely to be slowed, and the infection waves in other countries could further exacerbate supply shortages.”

“The meeting of ECB Governing Council will be seen in light of the new central bank strategy. Contentwise, I expect the ECB to largely continue its monetary policy stance. Three aspects deserve special attention also beyond this meeting:
(1) How narrowly does the ECB actually interpret its new, symmetric 2% target and how does it dif-fer from the Fed's average inflation target in practice?
(2) What is the medium- to longer-term im-pact of the new strategy on asset purchase programmes, especially the pandemic emergency programme (PEPP)?
(3) How do market participants interpret the new wording of monetary policy decisions in the Introductory Statement and Forward Guidance that Madame Lagarde had already announced when presenting the new strategy?

In my view, the symmetric inflation target is by no means a 180 degrees turnaround that makes way to an ultra-loose monetary policy indefinitely. Rather, in retrospect, the ECB has put its actions before and during the pandemic into a strategic framework. In the longer term, however, the symmetric character of the new target also implies the obligation to scale back the expansionary degree of monetary policy again, when indicated."

"The labour market has weathered the lockdown better than generally expected. Despite the significant drop in GDP in the first quarter, the number of unemployed persons has fallen since the end of the year and the number of people in employment has remained stable. For 2021 as a whole, I expect the number of people in work to rise slightly year-on-year to 44.8 million. The unemployment rate will fall from 5.9 to 5.7%. This looks like a very modest recovery but it means that by the end of the year the labour market will be almost as good as it was before the crisis. The biggest risk to the forecast is a renewed spike in infection rates. Vigilance is therefore still called for in the easing of restrictions. A major challenge for the German economy is the shortage of skilled workers, which has increased again considerably since last summer. According to the KfW-ifo Skilled Workers Barometer, in the second quarter of 2021 one in four companies again complained about impairments due to a lack of skilled workers, especially in the construction industry and among IT service providers. A second major challenge lies in reducing the rise in long-term unemployment. Education and qualification can make a significant contribution to curbing the undesirable developments. To this end, it is necessary to expand digital education and strengthen the motivation for lifelong learning and further education, the earlier in life the better. In order to improve equal opportunities, people from educationally disadvantaged backgrounds should receive special support."

“After the coronavirus-induced slump in start-up activity in Germany, 2021 promises to become a good year for start-ups. The cyclical upswing will provide a tailwind and the labour market is also likely to have a positive impact on start-up activity. Besides, many prospective entrepreneurs actually wanted to start their business already in 2020 and only deferred their projects because of the coronavirus crisis. They are far advanced in their planning process and close to implementation. That is also likely to benefit this year’s start-up activity.”

KfW Entrepreneurship Monitor 2021(PDF, 669 KB, non-accessible)

"In June, consumer prices in Germany, as measured by the consumer price index (CPI), increased by 2.3% year-on-year (HICP: 2.1%). This significant year-on-year increase is so far mainly attributable to base effects of the economic recovery, such as higher energy and raw material prices. However, a look at core inflation also shows a slight increase in underlying price pressures. This is likely to continue in the short term. I expect price pressure to come mainly from sectors that are benefiting directly from the opening of the economy or where production cannot keep pace with the current pick-up in demand due to supply chains that were interrupted last year. In addition, the special effect of the temporary reduction in VAT rates from H2 2020 is likely to put additional upward pressure on inflation in Germany in the coming months. Even if inflation rates subsequently pick up in the course of 2021, I expect inflation to be back within the ECB's target of "below but close to 2%" as early as 2022. In addition to the expiry of the base and special effects, we see signs that the current supply bottlenecks are being overcome."

“I expect the variation in new lending to bottom out in summer before it starts to recover in autumn as the negative base effect vanishes and the economic rebound gains momentum. But there are downside risks. After the coronavirus crisis, businesses will have to shoulder more debt than before and, particularly with a view to the transformation towards a climate-neutral economy, there is uncertainty about the overall framework. That could weigh on demand for investment finance for some time to come.”

"Difficulty in accessing finance is likely to continue gaining importance as a barrier to innovation especially after the acute crisis phase has been overcome. Given the tense liquidity situation and higher debt levels of companies, the trade-off between the desire for stronger resilience and the need for more investment in future competitiveness is becoming more difficult to manage. Innovation policy will therefore have to provide more financial incentives in order for businesses to innovate more than before the crisis. Besides, the skills shortage is currently slowing down innovation activity throughout the SME sector. Promotional measures aimed at building these companies’ innovation capacity must therefore be expanded. Innovations are crucial to addressing social challenges such as climate change, healthcare and demographic change. At the same time, they are the key to securing Germany’s good position in international competition – and thus to growth and prosperity. We can’t afford to respond slowly.”

"The ifo Index indicates a very dynamic economic performance in June. Just by looking at the street scene, it is clear that sales have increased significantly in most pandemic-affected service industries. What many missed during the long Corona winter can now be made up for, and thanks to savings from the Lockdown, some may find their wallets a little looser. Manufacturing and construction have not had sales problems for some time, but have been groaning for months due to pronounced bottlenecks in materials. While new orders in the manufacturing sector have already exceeded the pre-crisis level of February 2020 by 10%, industrial production was still a more than 6% below this level in April and had mostly been declining since the beginning of the year. The automotive industry, which is so important in this country, is particularly struggling with a shortage of semiconductors. But the shortages and the post-Corona boom in manufacturing are two sides of the same coin. Despite all the problems caused by the bottlenecks, it should not be forgotten that a pronounced demand overhang would have been considered an extremely positive scenario just a year ago.”

"The coronavirus crisis has depleted much of the financial reserves of companies in Germany. Along with great economic uncertainty, that has clearly affected the financing environment in recent months. Nevertheless, there are growing signs of a recovery. Enterprises are cautiously optimistic about investing this year in particular. Indeed, with a view to the necessary transition to a digital and climate-neutral economy, an investment surge is urgently needed.”

Business Survey 2021(PDF, 87 KB, non-accessible)

"The easing of the Corona measures is stimulating the US economy and pushing up prices. Inflation climbed to 5.0 per cent year-on-year in May, the highest level since August 2008. While the Federal Reserve may raise inflation forecasts slightly at its June meeting, the Fed will continue to classify much of the current inflation-boosting effects as temporary. Expiring base effects and diminishing effects of the economic opening ensure that the inflation rate will probably peak soon and fall in the second half of the year. Moreover, the labour market recovery is proving more arduous than hoped and I expect the Fed to maintain its expansionary monetary policy at its meeting. It will be closely watched if there will be any initial indications of a future tapering of bond purchases. If the Fed refrains from such signals at the current meeting, it may do so at the annual central bank conference in Jackson Hole at the end of August."

"It's all systems go for the German economy, with businesses feeling upbeat about the future and ready for the recovery. Mirroring the brightening economic sentiment, companies’ employment plans have switched to growth. That is very promising! But amid all the optimism there is still a need to be cautious. Lifting regulations too quickly might put Germany at risk of gambling away the most recent successes in containing the pandemic. If we open up carefully I am confident that the German economy will experience a strong growth surge in the further course of the year thanks to catch-up effects in the services sector and a progressive easing of shortages in the manufacturing supply chain. Despite the gloomy start to the year, gross domestic product is set to grow by 3.5% in 2021 and then by as much as 4.0% in 2022.”

KfW-ifo SME Barometer May 2021(PDF, 95 KB, non-accessible)

"The upcoming Council meeting will be conducted by the ECB on the basis of its new staff forecast. The ECB should now be much more optimistic about 2021, as the last forecast in March was influenced by rising incidence figures and the 3rd pandemic wave. I expect the ECB to slightly raise its GDP forecast for this year and the following year. With regard to the inflation forecast, I expect the March forecast to be confirmed, as the main drivers of the recent rise in inflation, such as base and one-off effects, were already known and foreseeable in March. Despite a more optimistic economic outlook, I still consider a continuation of the various monetary policy programmes in their current form likely. Discussions about an early end or a gradual reduction of the PEPP could be interpreted by market participants as a tightening signal and put pressure on interest rates."

"The vaccination offensive is beginning to take effect and the service providers affected by the lockdown are waiting in the wings and digging in their heels. This also applies to the countries to which the majority of German exports go. The economy has already picked up again in important sales countries for German industrial products. This is particularly true of China, which started the new year with a historic leap in growth. In the USA, too, the economy picked up again at the beginning of the year. The strengthening global economy is already benefitting industry. German exports in the first quarter were higher than in the last quarter before the crisis. And the large-scale growth packages of the European Union and the USA will give the economy a further boost as soon as the funds start flowing. If hotels, restaurants, stationary retailers and cultural and sports venues open their doors again across Germany, consumption will also pick up. Last year, the savings rate of German private households rose to a record 16%. In the Corona year 2020, people forwent almost all social consumption options, either completely or to a large extent. If a good portion of this is made up, it could become a turbo igniter for the economy. These are encouraging prospects, also for the labour market. Barring an unexpected setback, employment will rise sharply again by summer at the latest, unemployment will fall noticeably and the number of people on short-time contracts will drop sharply. For this to happen and for the economy as a whole to make a sustained recovery, one thing above all is needed: vaccinate, vaccinate, vaccinate.”

“Without a response, the skills shortage can grow from a serious challenge into an outright growth obstacle. After all, Germany is facing enormous challenges amid the demographically driven decline in labour force potential. A lot of hard work lies ahead, starting with the recovery from the coronavirus crisis, implementing the digital structural transformation and speeding up the transition to a climate-neutral economy through reducing the high government debt and managing the considerable growth of financial burdens for social protection systems to investing in better crisis resilience. If businesses face a considerable shortage of properly skilled workers, it will become hard to do all this successfully. Securing the skilled labour potential must therefore be given the highest priority. This can be done using three mechanisms: 1. Appropriate training and lifelong continuing education. 2. Promoting skilled migration, for example by simplifying the recognition of skills, and by offering German language courses and training for foreigners where local applicants cannot be recruited. And 3. Higher labour market participation in line with the Council of Economic Experts’ recommendation to modify the standard retirement age."

KfW-ifo Skilled Labour Barometer June 2021(PDF, 168 KB, non-accessible)

"Last month, corporate credit growth slowed sharply again. In particular, last year's historically high demand for bank loans continues to distort the view of lending to European companies in April 2021. As demand for credit peaked during the pandemic in Q2 in Germany, but not until the summer months in other major euro area countries, this is likely to continue to weigh on corporate credit growth in coming months. A further decline would have to be seen in this context. However, in addition to special effects, tighter lending conditions and the disbursement of government financial assistance are also playing a role. The latter have protected companies from further sales losses and reduced the need for additional external financing. In addition, the slowdown in corporate lending may also reflect companies' reduced willingness to invest in fixed capital while uncertainty about the timing and pace of the economic recovery persists. Planning certainty is of great importance for companies in this context, even beyond the pandemic. This is where policymakers can set important framework conditions.”

"In May, consumer prices, as measured by the consumer price index (CPI), rose by 2.5% (HICP: 2.4%) year on year and by 0.5% (HICP: 0.3%) relative to the previous month, respectively. This mainly reflects the recovery in the prices of oil and other raw materials, but also the ongoing economic recovery. Price fluctuations, which are a countermovement to the particularly volatile times of the past year, will continue to have a major impact on inflation in the 2nd half of the year: I expect additional price pressure from the summer months onwards, which is likely to push inflation in Germany above 3 percent throughout the second half of the year. However, this increase is mainly due to the VAT rates, which have now returned to their original level compared with the previous year. The reduced rates had temporarily lowered the price level in the second half of last year. The ongoing vaccination campaign is also enabling the consumption of some goods and services that people had to do without due to the pandemic. This could be accompanied by catch-up effects, a short-term shortage and thus higher prices. However, I consider permanently higher price growth unlikely, and expect prices to rise at a much weaker rate as early as the beginning of 2022."

“The third Corona wave is apparently broken and the sentiment in the companies is rising in line with the vaccination progress. This gives hope, but also urges patience. By easing too quickly in the short term, we would still risk losing the recent successes in containing the pandemic. If, on the other hand, we open the door cautiously now, I am confident that we will see a very strong growth spurt in the second half of the year thanks to catch-up effects in services, which have been restricted so far, and an increasing easing of input bottlenecks in manufacturing. We have therefore revised our economic forecast for 2021 upwards to 3.5% today, despite the poor start to the year.”

“The upturn in VC market sentiment which we saw at the end of the year 2020 continued in the first quarter of 2021. VC investors’ very good assessments of deal flow is particularly pleasing. After all, promising deal flow lays the foundation for promising VC investments. The indicators for deal flow quality and quantity are marginally below their all-time highs. This might reflect the fact that the coronavirus crisis accelerated demand for many start-ups because it has brought to light the needs for their innovative solutions. This opens up investment opportunities.”

“SME business sentiment improved for the third consecutive month in April, and the traditional rule of thumb is that this signals the beginning of an upswing. Businesses are looking to the future filled with hope, and more and more of them are anticipating a successful containment of the pandemic and a recovery later in the year. The chances of this hope turning into reality are good – provided new infections are consistently contained and vaccinations continue to pick up pace. Then Germany can experience a strong growth spurt in the second half of the year on the back of catch-up effects in currently banned services and in the retail sector. Manufacturers’ order books are already filled to the brim.”

“Municipal finances face the prospect of a long Covid. Cutting necessary municipal infrastructure investments has significant long-term consequences, since we need effective municipalities that perform their tasks efficiently to meet major challenges such as climate change and digitalisation in the public sector.”

“We will most likely see another significant rise in municipal debt, to be sure. But most municipalities have sufficient scope for this thanks to the positive development in the previous years. What is now important is that municipalities permanently retain their ability to operate during and after the crisis and efficiently perform their tasks.”

“It is understandable that during the crisis, our measures to stabilise municipal budgets will focus on the immediate future for the time being. But this crisis will hopefully soon be over, and strengthening municipal finances from the ground up will then be back on the political agenda. That is a good thing because the importance of having strong municipalities cannot be rated highly enough for Germany.”

KfW Municipal Panel 2021 – Summary(PDF, 103 KB, non-accessible)

“The pandemic and the long lockdown left their mark on German GDP at the start of 2021. Unlike last fall, the manufacturing sector only partially cushioned the decline in economic output, as companies were barely able to work off their full order books in view of supply bottlenecks for intermediate products. As the sentiment indicators from manufacturers are nevertheless climbing ever higher, the shortfall is probably only temporary. In the current quarter, the boost from the manufacturing sector is likely to ensure positive quarterly growth again. However, this is no consolation for the closed service companies. They can only cling to the accelerated vaccination progress, which promises sustainable opening steps and a significant growth spurt from the summer onwards."

„The monetary union begins the new year as the old one ended: with a drop in economic activity. The different timing of the alternating containment and easing measures has led to a more moderate decline in gross domestic product for the Eurozone than in Germany at the beginning of 2021. Nevertheless, the path back to the pre-crisis level has again become a little longer. In view of the vaccination campaigns that are now gaining momentum, there is improvement in sight for the summer. This is already very evident in economic sentiment. However, it is still unclear whether there will be a noticeable growth spurt in the current quarter. Many Eurozone countries have announced substantial steps to open up their economies. However, the risk of a continuation of yo-yo lockdowns is still high due to the widespread high incidence and burdened intensive capacities.”

“Due to the increased number of infections, the hospitality industry and retail sector have remained largely closed to customers despite the start of spring. Although the restrictions burden many businesses, the labour market remains an anchor of stability. Many companies have been hiring again since last summer. As a result, the number of employees subject to social insurance contributions has risen by a good 300,000 since June. In some sectors it is even higher than before the crisis. These include healthcare and social services, education and training, information and communications and construction. In the coming months, it will be important to set the course for a successful upturn. On the labour market, the aim is to increase the supply of skilled workers and reduce long-term unemployment. This requires increased efforts to improve skills. More than 3 million employees and 1.4 million unemployed have no vocational qualifications. Qualification is also the most promising way to enable employees in the lower income groups to earn more and to open up further prospects for those on short-time working. Welfare state interventions alone will hardly be able to reverse the drifting apart of wages and salaries diagnosed in the Poverty and Wealth Report of the government. This is because wage differentiation reflects not only differences in productivity but also shortages and it is not low-skilled workers who are becoming increasingly scarce but skilled workers who are qualified to meet demand.”

"The strong monetary growth on the ECB's balance sheet continues to be supported by ongoing asset purchases, especially government bonds. As expected however, lending to European companies has lost further momentum. This is likely to be due to two factors: On the one hand, lending in the previous year, i.e. at the beginning of the pandemic, was exceptionally high. This base effect is likely to continue to have a negative impact on credit growth in the coming months and should be interpreted in this context. However, various surveys also show that demand for credit has also declined. This could indicate an easing of the acute liquidity needs of companies. Above all, however, it is likely to be related to the continued reluctance of companies to invest in the wake of the pandemic. Also, likely to be economically relevant is the renewed, albeit only moderate, tightening of lending standards, especially by banks, for corporate loans. This makes it particularly difficult for hard-hit sectors of the economy, including the hospitality industry and stationary retail. Government support measures remain essential here until infection is better controlled."

“The latest rise in sentiment in the German economy is good news. After the business climate had already made a big leap upwards in March in the hope of easing and had distributed many advance praises for the upswing, the persistently difficult pandemic situation spoke more in favour of a decline in the business climate in April. For the upswing to become reality now, new infections must be consistently contained and the pace of vaccination must be further ramped up. Then I am confident that we will see a strong growth spurt in the second half of the year thanks to catch-up effects in the previously banned services and trade. In industry, the order situation is already bright, but so far production is still hampered by supply-side bottlenecks, especially in semiconductors.”

"Thanks to the successful vaccination campaign, relaxed Corona measures and expansive fiscal policy, the US economy has started the second quarter with considerable momentum. An increase in demand is also stimulating prices, and so inflation rose in March from 1.7 to 2.6 % year-on-year. However, this increase is not only a result of the economic recovery but also the low price level in the same period last year due to the beginning of the Corona crisis. But the Fed keeps emphasising that this so-called "base effect" is only temporary and that monetary policy will consequently not react to it. It is therefore to be expected that the Fed will stick to its expansionary monetary policy at the meeting next Wednesday. Fed Chairman Powell also recently pointed out that the Fed wants to see further "substantial" progress in achieving its goals before taking its foot off the pedal. For example, the central bank wants to ensure that disadvantaged groups of the population also participate in the recovery and the Fed seems to be willing to support the US economy for longer than it was the case in past recovery phases."

“The uncertainty created by the pandemic continues to put the brakes on businesses’ investment behaviour and, hence, credit demand. In the sectors hit particularly hard by restrictions such as hospitality, the strained financial situation – sometimes coupled with survival fears – is likely to be preventing many a business from borrowing more. Instead, companies that have been particularly affected are likely to prefer bridging assistance from the government, special write-downs and (equity) grants.”

KfW-ifo Credit Constraint Indicator April 2021(PDF, 122 KB, non-accessible)

“The coronavirus crisis really put the handbrake on in-company continuing education in 2020 because many companies do not have the money, time and planning certainty they need. Short-term measures aimed at stabilising turnover and liquidity take precedence. This is a challenge for the economy as a whole, especially because we are in the midst of a digital structural transformation. Lack of skills in the workforce is one of the biggest barriers to digitalisation in the SME sector. One third of enterprises were facing a digital skills shortage already before the crisis. Without a significant increase in continuing education activities – ideally throughout the crisis – SMEs will lose competitiveness”, added Köhler-Geib. “Companies are more dependent on support for continuing education than before. Besides promotional loans and cost reimbursement, this could include tax benefits for continuing education expenditure that treats investment in human capital in the same way as investment in assets and permits depreciation.”

Continuing education has dropped in the crisis – need for digital skills is growing (PDF, 196 KB, non-accessible)

“Despite positive sentiment indicators, initial figures point to weak economic development in the euro area in the first quarter of 2021. In addition, the pandemic situation remains difficult and forced several member states to further tighten their health policy measures. At the same time, the inflation rate is on a temporary upward trend characterized by higher energy prices and base effects. This is expected to continue until the end of the year. However, I do not currently see any signs of significant price increases beyond 2021. On the contrary, recently concluded collective bar-gaining rounds, for example in the metal and electrical industries in Germany, are focusing more on job security than on strong wage growth. However, the ECB has already taken account of the changed inflation trends for this year with an upward revision of its forecast in March. At the next ECB meeting, I expect the current monetary policy parameters to be maintained. With the PEPP, the central bank continues to have enough leeway and flexibility to respond to short-term tighten-ing of financing conditions for sovereigns and the corporate sector. A discussion about an end to the purchase programs and initial interest rate hikes remains premature.”

“Unlike in the spring of 2020, there was no increased demand for credit in response to the restrictions mandated during the second coronavirus wave”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “This is probably mostly because its impact on the overall economy has been less severe.” To be sure, the lockdown ‘light’ imposed in autumn and its tightening from mid-December put renewed pressure on many businesses – mostly in those sectors that were directly affected by closures. Nevertheless, the fourth quarter did manage to close with positive economic growth of 0.3% on the previous quarter. “The combination of a relatively stable economic situation, financial support from the state and businesses’ ability to adapt their offerings and costs has enabled them to consolidate their financial position. The need for new loans to keep businesses running in the pandemic has fallen”, said Köhler-Geib.

KfW Credit Market Outlook March 2021(PDF, 136 KB, non-accessible)

“The March findings of the KfW-ifo SME Barometer show a very encouraging improvement in sentiment on all fronts, but they are merely a snapshot”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The loosening of restrictions announced for retailers and hospitality operators in early March – subject to falling case numbers – and the positive outlook for the global economy was probably the main driver behind the marked improvement in sentiment. But given the surging new wave of infections and the more contagious UK virus mutation, renewed restrictions and extended containment measures are now necessary. That will push back the economic recovery. But the strong improvements in sentiment across the economy as a whole in March illustrate the great potential for a rebound once the pandemic has been successfully suppressed. They are a vote of confidence in the coming economic rebound”, added Köhler-Geib. “By September, the six-month horizon for which business expectations were surveyed, a comprehensive recovery is definitely plausible. But this will be contingent on a systematic acceleration of the vaccination rollout combined with a convincing testing strategy.”

KfW-ifo SME Barometer March 2021(PDF, 155 KB, non-accessible)

"With infection figures soaring again, hopes of an end to the lockdown by Easter have been dashed. This is bitter for many affected businesses, who are burdened by the lockdown and worries about the future. The uncertain business outlook is hampering much-needed investment and innovation, as well as preventing vacancies and apprenticeships being filled. That's why we urgently need a "whatever it takes" mentality now when it comes to vaccinations, testing and contact tracing. This is the only way we can sustainably escape the lockdown. Until this can be achieved, the federal and state governments can only support the businesses affected by the lockdown with economic assistance. A look at business registrations makes it clear that the measures are having an effect: In January 2021, around 43,900 businesses gave up their trade, compared with 55,900 a year earlier. And in the crisis-hit hospitality industry, only 2,700 innkeepers and hoteliers gave up their businesses in January 2021, compared with 4,500 a year earlier. In 2020 as a whole there were significantly fewer business closures than a year earlier thanks to the economic aid and the suspension of the obligation to file for insolvency. This is a success in the fight against the economic crisis but in perspective it must be reconciled with structural change. After all, companies have to face up to competition and only those that can sustainably cover their costs and generate profits from their own sales will be able to survive and retain their jobs. At present, the service companies hit hard by the lockdown can only cover their costs with the support of economic aid. Short-time allowance continues to stabilise the labour market but it is also clear that this is only a temporary solution."

“In March, consumer prices, as measured by the consumer price index (CPI), rose by 1.7% (HICP: 2.0%) year on year and by 0.5% (HICP: 0.5%) relative to the previous month. Price developments in Germany in 2021 will thus continue to be characterized by base and special effects. For example, the price increase in March is likely to be mainly attributable to hikes in oil prices and other raw materials following the global economic recovery. This base effect is likely to intensify over the course of the year, particularly in the second quarter, but will fade by the end of the year. Whether there will be additional price pressure will depend above all on the further course of the pandemic. With the end of most health restrictions, increased consumption demand for goods and services, which was not possible for some time, could lead to short-term supply bottlenecks and thus higher prices, also in restaurant and accommodation services and in transportation. However, if the third wave makes a new tightening necessary, this poses a downside risk to price developments. Against this backdrop, I welcome the communication from the European Central Bank (ECB): It signals that the ECB will see through the current price development and that no fundamental change in course is to be expected due to temporary price fluctuations.”

“The economy is in a stop-and-go mode, with lockdowns and easings alternating at the rhythm of Corona waves. Business confidence has now risen significantly in March, but this is only a snapshot in time given the renewed – and unfortunately necessary, because of the British viral mutant – tightening of containment measures. With the third wave of infection building up, the expected economic recovery will be pushed back somewhat. This makes a consistent expansion of vaccinations, combined with a convincing testing strategy, all the more important. Only then can economic activity, which is currently taking place mainly in the producing sector, gradually return to trade and services as well and ensure strong growth later in 2021.”

"The growth of monetary aggregates in the euro area is increasingly driven by credit flows to the public sector and is less and less attributable to new lending to the private sector. The European corporate credit market has been losing momentum since the pandemic-induced surge in the spring and summer, although this cannot yet be seen in the year-on-year comparison of loan stocks. On the positive side, this development points to a stabilisation of the liquidity situation in companies. However, this is likely to apply above all to those sectors in which things are looking up despite the continuing burdens of the pandemic. European industry, for example, shone in March with excellent sentiment values. Things remain difficult for hard-hit sectors of the economy, including the hospitality industry and the stationary retail trade. Here, government support remains important until infection is better controlled. Looking to the future and the necessary structural changes, I am also concerned about the subdued demand for investment financing."

"The US inflation rate rose slightly year-on-year in February and now stands at 1.7%. A no-ticeable increase is to be expected in the short term, as the Corona crisis led to significant price declines last year. However, the US Federal Reserve has repeatedly emphasised that it will look through these temporary effects. In the coming months, the recent economic recovery will give inflation a further boost. The successful vaccination campaign, falling infection figures and the 1.9 trillion US-dollar fiscal package will provide an additional tailwind for the economy. Nevertheless, the Fed is expected to maintain its expansionary monetary policy at Wednesday's meeting. The economic recovery is uneven and, according to Federal Reserve Chairman Jerome Powell, far from complete. Moreover, in addition to an inflation target, the Fed is also aiming for maximum employment. A price increase of over 2% could therefore be tolerated for a while, given that there are currently still 9.5 million fewer US Americans in work than before the Corona crisis."

“Digitalisation is a beacon of hope for enhancing the competitiveness of broad sections of the economy and for a return to higher productivity rates. With the crisis now expected to improve in the further course of this year, SMEs will have to keep up the momentum of their digitalisation efforts and move beyond remote working and video conferences as new achievements. Companies now have to address strategic digitalisation projects and secure and continue developing the qualities that have proven to be beneficial during the crisis in the long term, such as flexibility, initiative and entrepreneurial spirit. Many businesses will probably find this to be challenging. The tense liquidity situation and debt levels, which have risen in the course of the crisis, are likely to hamper the implementation of such projects when the crisis is over. Besides, many businesses are sure to have developed a greater desire to become more crisis resilient as a result of the pandemic. In order to address these conflicting goals of enhancing crisis resilience and increasing competitiveness, businesses require investment incentives for digital transformation and improved frameworks. That can enable them to complete the necessary digital transformation, stay in the race against international competitors and harness growth opportunities.”

KfW SME Digitalisation Report 2020(PDF, 1 MB, non-accessible)

“The ECB Governing Council is likely to use its meeting next Thursday to evaluate the stronger than expected inflation performance of the past two months and the increase in bond yields, especially on U.S. government bonds. I expect the ECB to make a noticeable upward adjustment in its inflation forecast for 2021. For example, its December forecast is still based on a significantly lower oil price. In addition, the continued health policy restrictions could be accompanied by short-term supply bottlenecks and higher prices once they are lifted. However, the current higher inflation rates are unlikely to lead to a fundamental change in the monetary policy stance. Rather, the ECB will emphasize that it sees little evidence of inflationary pressures beyond 2021, by which time temporary and base effects will have subsided. In addition, the longer-than-expected policy restrictions will negatively impact Q1 GDP. In dealing with this and the rise in (real) yields, the ECB could use the flexibility built into the PEPP in the short term and step up the recent rather below-average weekly purchases again.”

“This year, there is unfortunately little good news from Germany’s SME sector for International Women’s Day on 8 March: women are still underrepresented at the helm of small and medium-sized enterprises, and their numbers increased little in 2020 during the pandemic. The reluctance of women to start up businesses, which we have seen for several years, is slowing the rise in the numbers of women-managed businesses. The fact that young female self-employment has been more badly hit by the COVID-19 restrictions, is likely to put a further damper on prospects. It seems unlikely that more women will be found at the executive levels of small and medium-sized enterprises in the foreseeable future.”

“Coping with the Corona pandemic has been and will be associated with further, substantial finan-cial burdens for the EU member states. The temporary application of the escape clauses enshrined in the European fiscal rules therefore provides additional room for maneuver. The EU Commission today proposed to apply the escape clause also to the year 2022. The aim is to ensure that the fiscal stimulus does not have to be withdrawn too early, due to the rules, and that the economic recov-ery after the pandemic is stalled. Against the backdrop that some member states may need until 2023 to reach the pre-crisis level of GDP, this proposal appears to make perfect sense. However, in view of the structurally high debt levels in the euro area and the ECB as the largest single creditor of the member states, medium-term strategies that credibly reduce debt levels to long-term sustain-able levels are crucial. The targeted and efficient use of Recovery Fund resources is just as much a starting point as the fiscal reform process. In this way, fiscal sustainability can be combined with the need for investment in green and digital projects for the future."

“After the crashing slump in December, retail sales have now fallen even further. No wonder, because the retail sector was hit by two adversities at once in January: the lockdown and the withdrawal of the temporary VAT cut, the extension of which would have helped only those companies that hardly suffered any losses anyway. Since a significant part of the retail sector – including mail order, supermarkets and other convenience stores – remained open during the lockdown, the aggregate minus of 4.5% says little about the shortfall in the closed stores. In some cases, the scope for adjustment is limited, which is why the need for targeted support remains high. In terms of the economy as a whole, we will come through the second lockdown much better than through the first, thanks to the stable recovery in manufacturing. For the sectors directly affected by the lock-down, however, this is little consolation.”

“Although the improved SME business sentiment in February makes for a hint of spring, hopes of a swift end to the lockdown seem likely to be dashed in view of the rapid spread of the more infectious variants of the virus and the fact that infection rates are now only stagnating. GDP is expected to shrink tangibly, given the long lockdown at the start of the year, although positive trends in the manufacturing sector, which has been able to largely decouple itself from the pandemic, should prevent a nosedive like the one we saw in spring 2020. The second quarter should see solid growth even if the lockdown is eased only cautiously. But real relief for the sectors that have been hard hit by restrictions cannot be expected before the summer, once the vaccination campaign has made genuine progress. For this, and in the meantime, it is up to the political level to take steps to prevent a third wave, including targeted use of rapid antigen tests and effective contact tracing.”

“The ECB Governing Council is likely to use its meeting next Thursday to evaluate the stronger than expected inflation performance of the past two months and the increase in bond yields, especially on U.S. government bonds. I expect the ECB to make a noticeable upward adjustment in its inflation forecast for 2021. For example, its December forecast is still based on a significantly lower oil price. In addition, the continued health policy restrictions could be accompanied by short-term supply bottlenecks and higher prices once they are lifted. However, the current higher inflation rates are unlikely to lead to a fundamental change in the monetary policy stance. Rather, the ECB will emphasize that it sees little evidence of inflationary pressures beyond 2021, by which time temporary and base effects will have subsided. In addition, the longer-than-expected policy restrictions will negatively impact Q1 GDP. In dealing with this and the rise in (real) yields, the ECB could use the flexibility built into the PEPP in the short term and step up the recent rather below-average weekly purchases again.”

"Bank loans to European companies are still growing at strong rates year-on-year. However, this has been masking a significant cooling of credit dynamics for quite a while now. This can be seen in the monthly credit flows, which came to a net standstill in January. At the same time, bank deposits of non-financial corporations exceed last year's level by more than a fifth. On the surface, these aggregate figures give the impression of an adequate liquidity situation in the European corporate sector. However, this would be a misconception, as there are now large divergences in the extent to which individual sectors and companies have been affected by the pandemic. Financial aid by governments and the maintenance of favourable financing conditions by the ECB therefore remain necessary for the time being to limit the economic damage caused by the virus."

"Bank loans to European companies are still growing at strong rates year-on-year. However, this has been masking a significant cooling of credit dynamics for quite a while now. This can be seen in the monthly credit flows, which came to a net standstill in January. At the same time, bank deposits of non-financial corporations exceed last year's level by more than a fifth. On the surface, these aggregate figures give the impression of an adequate liquidity situation in the European corporate sector. However, this would be a misconception, as there are now large divergences in the extent to which individual sectors and companies have been affected by the pandemic. Financial aid by governments and the maintenance of favourable financing conditions by the ECB therefore remain necessary for the time being to limit the economic damage caused by the virus."

“A subsiding infection situation in February, supports a noticeable rise in business confidence. It has risen because, at the time of the survey, companies expected a cautious easing of the long lockdown in March. The spread of viral mutations is currently calling that into question again. If they can be kept in check, decent growth in the second quarter is certainly in the cards after a noticeably negative opening quarter. However, a real easing of the situation can only be expected with significant progress in vaccination, as we are still a long way from the low incidence rates seen after the first lockdown. Sufficient vaccine doses will probably be available by summer, but timely expansion of vaccination capacity will also be important. In the meantime, policy is also needed to prevent a third wave of infection with measures such as wisely used rapid tests and improved contact tracing.”

“The KfW-ifo SME Barometer shows a bad start to the year and growing pessimism among the majority of small and medium-sized enterprises. Compared with last spring, however, sentiment in the sectors affected by the restrictions is at least no longer dropping quite as low. Adaptation measures such as the introduction of contactless sales channels are likely to pay off. Most of all, however, the manufacturing sector appears to have decoupled from the pandemic activity, so that gross domestic product will contract much less in the current quarter than last spring. But the spread of virus mutations has created great uncertainty about the further course of the pandemic. Nevertheless, an economic recovery can be expected in the spring. The extent of the rebound, however, will depend heavily on progress in vaccine rollout and the success of the current lockdown.”

KfW-ifo SME Barometer January 2021(PDF, 242 KB, non-accessible)

"The European economy proved more resilient in the autumn quarter than initially expected. In view of high infection figures and renewed, partly strict lockdown measures, the decline in euro area GDP of 0.7% is comparatively moderate. Nevertheless, the balance for 2020 as a whole is devastating also from an economic perspective. The bottom line is that overall economic output fell by 6.8%, which is significantly more than during the financial crisis. However, it is good news that consumers and companies are better able to adjust to the difficult conditions as the pandemic continues. Industry in particular continued its catch-up movement quite unimpressed, partially compensating for the restrictions in other sectors in the second lockdown. Nevertheless, the outlook is subdued. Due to the intensity of the virus spread and the danger posed by mutations, health protection measures will remain in force for some time to come. As a result, GDP in the monetary union is likely to contract again in the current quarter. From spring onwards, I expect the recovery to resume, although its extent will depend on the still uncertain progress of vaccinations. Any resources and efforts leading to a rapid improvement in the pace of vaccinations would more than pay off."

“At +0.1%, German GDP in the final quarter of 2020 is virtually on par with the previous quarter. Destatis had already indicated such an outcome around two weeks ago on the occasion of the presentation of the preliminary results for 2020 as a whole. Measured against the original concerns at the beginning of the second lockdown, this is good news in what continues to be a very difficult time. With the lockdown extended once again until at least mid-February, we must now unfortunately brace ourselves for a significant decline in economic output in the opening quarter of 2021 of between a good -1% and -3% before the economy picks up again from next spring onwards with the then hopefully possible return of public life. The expected decline in economic activity will at least be far milder than the steep drop in the first lockdown, as the inevitable downturn in the restricted service sectors will be at least partially offset by upward industrial production. To reconcile health protection and economic activity, approaches to make the lockdown more efficient are helpful. This includes expanding home office work where possible.”

"The extension and tightening of the lockdown is once again demanding a high level of acceptance and stamina from citizens, employees and companies. This is a tough test for many. However, the current lockdown is expected to have a far less serious impact on the economy as a whole than the lockdown in the spring of last year. There are several reasons for this: Manufacturing and exports are far less affected, many businesses have established alternative sales channels with online sales or delivery and pick-up services and others have upgraded IT technology and allowed more employees to work from home. The possibility of vaccinating a large part of the population during the year opens up the prospect of containing the pandemic by the summer to the point where it has little impact on the economy. If enough people get vaccinated and the vaccines work as hoped, we may see a significant upturn in the second half of the year. Under these conditions, it is likely that the number of people in work in 2021 will again be slightly higher than in the crisis year 2020, at 44.9 million, and the unemployment rate should fall from 5.9% in 2020 to 5.8% in 2021."

“Growth in loans of non-financial corporations on the balance sheets of European banks has leveled off in recent months at 7%. In Germany, however, it is now significantly weaker than the European average. Member states' credit guarantees have played a major role in stabilizing access to bank loans in the euro area, even during the pandemic. Now, however, there are increasing signs that banks are becoming more cautious in their lending and are pricing in higher risks in their lending conditions. Most recently, for example, a clear majority of European financial institutions in the ECB's Bank Lending Survey indicated that they had tightened lending standards. This is likely to be a direct consequence of the containment measures taken to combat the second wave of infection. While uncertainty about the further course of the pandemic is dampening demand for credit and thus the growth prospects for corporate lending, unhindered access to credit for companies with functioning business models nevertheless remains an important prerequisite for economic recovery.”

“In the second coronavirus wave so far there has been little interest in bank loans; companies’ demand has dropped to a record low. The likelly main reason is that businesses are very reluctant to invest because of uncertainty about the further course of the pandemic. That is understandable from a business perspective but has severe consequences for the overall economy in the medium term. It will cause the backlog in major structural issues such as digitalisation and sustainability to grow bigger and bigger. According to preliminary figures released by the German Federal Statistical Office, companies invested 6.6% less in their businesses in 2020 than in the previous year. Demand for debt capital was also reduced by the fact that manufacturing, a significant part of the economy, is hardly affected by restrictions, unlike in spring. Besides, the government’s additional financial support for businesses has limited liquidity shortages – despite all problems. Another aspect which I believe plays a role is that as the crisis grinds on, some businesses may no longer be able or willing to take on additional debt burdens to offset losses in turnover.”

KfW-ifo Credit Constraint Indicator January 2021(PDF, 142 KB, non-accessible)

“After the U.S. economy grew by an annualized 33.4 percent in the third quarter of 2020 compared with the previous period, GDP increased by just 4.0 in the fourth quarter. The slowdown in the economic recovery comes as little surprise, given that rising infection figures and the associated containment measures weighed on economic activity at the end of the year. Beneath the surface, the picture is twofold. While the recovery in manufacturing sector and the real estate market con-tinued in the final quarter, household consumption was held back by Corona restrictions and the cooling of the labour market. Although the pandemic continues to weigh on economic activity at the beginning of the year, the economic recovery could pick up speed again in the summer months. On the one hand, the number of infections is expected to fall thanks to an increase in vaccination rates and the shift to outdoor activities, and on the other hand, the new government is planning extensive fiscal packages which should provide additional support for the economy.”

"The economic recovery in the US has slowed significantly recently. Rising infection rates and the accom­panying containment measures are weighing on the job market and households. Total non-farm employment fell by 140,000 in December and retail sales recorded a decline for the third month in a row. The Fed will maintain its loose monetary policy until the US economy stabilises. No change is expected in either interest rates or the purchase programme. Falling infection figures combined with fiscal stimulus should boost economic activity in summer and raise the inflation rate in the medium term. However, last year's switch to an average inflation target will allow the Fed to approve price increases of more than 2% for a while, as the inflation rate has already been below the monetary guardians' target for some time. Moreover, excess capacities that still exist will counteract a significant overshooting of the two-percent mark. A key rate hike seems therefore ex-tremely unlikely this year."

“The start into 2021 is tough, the recovery follows in the course of the year – the ifo Business Climate is currently also moving within this range of virtually all current economic forecasts. Unfortunately, it clouded over again in January. Concerns apparently predominate in view of the difficult start to the year for many companies constrained by the Corona measures. For more hope to become reality again, patience and discipline are still needed first in pushing back the new infections, an effective vaccination strategy including further capacity expansion, and effective support for businesses affected by the lockdown, especially in the trade and services sectors. With the return of public life then possible, the chances of a strong recovery from spring onwards are good. Moreover, stable upward industrial production ensures that the macroeconomic damage in the current lockdown is likely to be far less than in the first half of 2020.”

“The coronavirus crisis initially triggered a wave of innovation and digitalisation in many businesses, such as the expansion of home working capacities or changes to sales methods. But this push is superficial. After all, we see that the coronavirus pandemic is impacting on future investment in the SME sector overall. This applies to the immediate period during the acute crisis, and a downturn in future investment must be feared after the crisis as well, because businesses will then invest more in crisis resilience. These financial resources will then be unavailable for investment in greater competitiveness. Economic incentives can help reconcile these conflicting goals.”

Coronavirus crisis is hampering innovation, digitalisation sees mixed trend(PDF, 184 KB, non-accessible)

“The 46th President of the USA Joe Biden takes office at a difficult time. The number of new Corona infections in the USA remains at a worryingly high level and Corona-related deaths have also recently reached new highs. The strong economic recovery which we saw in the autumn has lost its steam significantly due to the new wave of infections and associated containment efforts. Joe Biden has made it his mission to jumpstart the country in both its response to the pandemic and its economic recovery. To do so he has laid out plans for a USD 1.9 trillion Corona aid package, with USD 400 billion for testing and vaccination, and a large package of stimulus support for households, businesses and communities. Against the backdrop of another very high number of new claims for unemployment benefits and the possible expiration of the unemployment benefit subsidy in mid-March, it makes sense to bring this stabilisation package to Congress first. Another fiscal package addressing structural issues such as infrastructure and climate change will follow later. President Biden is depending on votes from Republican senators to implement his plans. However, the ongoing impeachment proceedings against Donald Trump could have a straining effect on the already difficult relationship between the two parties, especially in the early days of the new presidentship. "

“Thursday's meeting of the ECB Governing Council is unlikely to bring any surprises. I expect the ECB to keep its foot on the accelerator. However, an acceleration, i.e. a further increase in its degree of expansion, seems unlikely at present. It is true that the inflation rate in the euro area is still far from the ECB's target (2%). However, recent economic development in Germany and the euro area has been not as bad as expected. The ECB will therefore want to wait and see whether and for how long the pandemic-related restrictions will extend into Q2 and how much this could affect the economy. The monetary policy discussion is currently somewhat different in the USA: On the one hand, concerns about a noticeable rise in inflation in the course of the year have led several prominent central bankers to call for initial tightening ("tapering") at the end of the year. On the other hand, with its new average inflation target, the Fed has sufficient leeway to not have to tighten immediately. However, looking at the data and the ECB's forward guidance communication, a tightening debate for the euro area seems premature."

“The Corona pandemic left deep economic scars on Germany in 2020: the reported GDP slump of 5.0% is the second strongest since the Federal Republic came into existence, just behind the financial crisis of 2009 and far behind all other recession years. Measured against the original fears after the outbreak of the pandemic, however, this sad result is also a success in damage limitation. For in March last year, a leading German research institute considered a crash in economic output of up to 20% possible, and by mid-year the consensus forecast was still -6.5%. The successful damage limitation is due to the effective containment of the first wave of infections, the easing that this made possible from May onwards, and the accompanying, very extensive economic policy stabilisation measures. The recovery in manufacturing that began in the summer has so far ensured that Ger-many has at least come through the second lockdown, which began at the beginning of November, relatively unscathed. This gives me hope, even if the renewed extension and tightening of the restrictions makes a contraction of GDP in the first quarter of 2021 likely. With the prospect of large-scale deployment of effective vaccines soon, as well as the experience of a rapid pace of recovery last summer, a strong rebound later in 2021 is still very likely.

The Corona pandemic brought a turning point in the German government budget: after eight con-secutive years of surpluses, the government ended 2020 with a deficit of EUR 158 billion or 4.8% of GDP. The very strong fiscal stimulus from the March Corona Shield and the June stimulus pro-gramme do justice to the historic crisis. The swift and courageous intervention protected the economic substance in the lockdown, spurred the recovery and thus saved the economy from worse. The crisis is not over yet, however, and the need for government support remains high for the time being. Fortunately, Germany can afford this support. Germany's gross public debt, at an estimated just over 70% of GDP last year, was far lower than at its peak after the financial crisis (2010: 82%) and also than in other major industrialised countries. Of course, long-term debt sustainability re-mains a key issue. Here it is crucial that the interest burden ratio of the German government is historically low despite rising borrowing because of the current low interest rate environment. There is therefore scope, and it is even advisable, to tackle the necessary consolidation only once the crisis has been sustainably overcome and the economy has embarked on a self-sustaining upswing. I am convinced that the best prospects for a sustainable recovery of the German economy exist if it is possible to use the necessary aid effectively for the green and digital transformation of the economy and society.”

“Enterprises that can or must focus on only a few markets are particularly vulnerable. SMEs are therefore well advised to tap into new sales and procurement markets. More than half of small and medium-sized SME exporters in Germany do business in not more than two target regions.But enterprises must also be able to afford to increase their resilience against future shocks. The expected short-term efficiency losses may prevent enterprises from reconfiguring their value chains if they are under high competitive pressure. After enterprises borrowed capital to bridge liquidity bottlenecks during the coronavirus crisis, they may now have difficulty accessing financial resources they need to realign supplier relationships or tap into new sales markets. New digital technologies facilitate integration into global value chains and can help enterprises better manage risks in their supply relationships. That makes the decision to build up resilience easier for SMEs and prepares them better for the next crisis."

“The prospect of effective vaccines being deployed soon and successes in the fight against the pandemic in Asia are immunising the economy and the business climate. Although Europe and many U.S. regions are in more or less strict lockdowns, the industry continues to catch up – a development that is ongoing in the short term despite the tightening that took effect on Wednesday. For high-street retailers, the Christmas shutdown is a tough blow, but economically the effect is likely to be limited because of their rather small share in GDP, as well as the shift to online retailing. For minimising economic damage, the time around the turn of the year is more appropriate than any other, because in many cases economic activity is shut down anyway. The tighter lockdown opens up the possibility that at least some of the now restricted economy can be ramped up again in the first quarter, or at least prevent even more drastic measures. For this to work, broad participation by the society will be needed, as will improved safeguards for school operations, including increased testing activity, and increased contact-tracking capacity.”

“So far, most small and medium-sized enterprises are likely to have stuck to their succession plans despite the coronavirus crisis, as SMEs entered the crisis well-prepared. But the more the crisis drags on, the higher the risk of closure instead of orderly succession. Successful generational transition in the SME sector clearly depends on the severity and progression of the coronavirus crisis. For example, putting plans for medium-term succession off for too long would diminish the chances of success. Successful business transition requires several years of planning. And even well advanced negotiations – with the finish line in plain sight – can fail if the overall environment changes dramatically.

It is therefore essential for enterprises to be released as quickly as possible from having to deal (only) with securing their immediate survival and to be able to return to important issues of the future. The current advances in vaccine development are also very important for business succession because an economic recovery allows companies to shift their focus back on making transfer arrangements. In the meantime, government assistance that secures continued liquidity for small and medium-sized enterprises while signalling political determination on the way out of the crisis is a key building block. The second building block consists in activating and supporting potential takeover entrepreneurs. After all, the combination of unfavourable demographics and diminishing entrepreneurial spirit means that the demand for successors will outstrip the supply for years to come."

“The decisions of the ECB's Governing Council are awaited almost as eagerly as Santa Claus, as ECB President Christine Lagarde announced a review of all monetary policy instruments at the last meeting. In view of the second wave of infection and the renewed contraction of the euro economy, the ECB will do everything possible to keep financing conditions very favorable. Ultimately, it is likely to result in a recalibration of the two crisis instruments PEPP and TLTRO: By keeping interest rates on government bonds low everywhere with the PEP-Program, the ECB wants to ensure that the fiscal support measures are not withdrawn too early. Meanwhile, the targeted longer-term refinancing transactions (TLTROs) give banks a strong incentive to expand their lending. I expect PEPP to be increased by around EUR 500 billion in combination with an extension until the end of 2021. Although the increase is currently similar to refueling with a half-full tank, in the end the funds will not have to be used up completely. I also expect additional auctions of the targeted longer-term refinancing transactions until at least the end of 2021 with further improved conditions. If the ECB should further reduce the deposit rate in addition to the expected changes to PEPP and TLTRO, this might be rather counterproductive. Firstly, this would result in a loss of political capital in the northern euro countries and secondly, this step could rather unsettle the markets in the current situation, as the ECB has not gone so far even in March, when the situation was much more critical.”

“As a result of the second wave of infections in Germany and the partial lockdown that was recently extended until at least 20 December, the German economy will likely contract by around 1% this quarter. The current KfW-ifo SME Barometer shows that small and medium-sized enterprises in particular anticipate setbacks, even though they expect them tol be less dramatic than in the spring”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “In the short term, unfortunately, a relatively sweeping ban on business activities with high risk of infection will be inevitable. Over the medium term, however, the successes in vaccine development mean there is much light at the end of the tunnel.”

“Simple pleas and a reliance on voluntary actions and discretion had to be further built upon in order to curb the corona pandemic. This meant that a new lockdown for restaurants and hotels, cultural events and personal services was unavoidable. The measures are now being extended and tightened. Developments in other countries show what can happen if the pandemic is not contained sufficiently: If Germany had as many corona deaths per inhabitant as Great Britain, France, Italy, Sweden, Spain or the USA, we would already have 40,000 to 55,000 more corona deaths. We must keep these figures in mind when considering the containment measures. When the German Council of Economic Experts (“Sachverständigenrat”) praises the Federal Government for its pandemic management, I can only support it – both from a health and economic policy perspective. As a result of the “lockdown light”, GDP will shrink again but much less than in the spring. The number of unemployed persons could increase by about 100,000 as a result of business closures and the number of short-time workers could temporarily increase by up to half a million. This will particularly affect low-skilled workers, mini-jobbers and those in lower income brackets. Promoting retraining and further training can therefore be the most effective way of helping to bring down unemployment again quickly next year. Overall, skilled workers are in demand in Germany, as it is expected that, among other things, the shortage of skilled workers in the health and care sector and in MINT occupations, alongside a lack of digitisation skills, will hinder growth in the years to come. Vocational education and training must therefore be geared towards reducing deficits in problem areas.”

What we need is a digital and green investment surge. And now is the time for economic policymakers to create the framework, provide incentives for investment and lead the way with start-up finance in order to make future growth possible in the two key areas of digitalisation and climate action. There are many starting points from which to attenuate the target conflict between financial resilience and capital expenditure in which many businesses find themselves. These include reducing the uncertainty for providers of capital, for example through a reliable signal for rising CO2 prices, addressing constraints such as skills shortages and lowering financing costs. We face major challenges but this is precisely the right time to chart the course forward to come out of the crisis stronger. We must think beyond the coronavirus crisis in order to secure lasting growth and prosperity in Germany."

“For the first time since April, growth in corporate loan stocks in European banks' balance sheets has fallen below the seven percent mark. The slowdown had already become apparent in the banks' reporting on new business volumes. Many companies are likely to have built up sufficient liquidity to get through the pandemic. According to the information provided by the financial institutions in the Bank Lending Survey of October, the demand for credit declined due to falling working capital needs and the continuing weakness of investment. In addition, legislative and non-legislative moratorium agreements that were agreed for around 10% of European corporate lending are now gradually coming to an end. Despite the second wave of infections, the peak of borrowing is therefore likely to be behind us. Nevertheless, an intact supply of credit remains just as important as a safety net for heavily affected regions and sectors as it is for companies that want to invest in their future now.”

"The ifo Business Climate shows that German companies are facing a difficult winter. Thanks to the good news from the vaccine development, the long-term outlook has improved. However, the second wave of infection still needs to be broken, probably with extended containment measures. In our "Economic Compass" published today, we expect economic output to decline by about 1% in the current winter quarter, far less than in the spring. This is due to the fact that the restrictions affect a smaller share of the economy and that industry remains on course for recovery. The down-side risks remain high.”

“In October the worry lines among SMEs deepened again because of the rapid spread of new COVID-19 infections and foreseeable business restrictions”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The partial lockdown announced for November in Germany and almost all other European countries will interrupt the economic recovery for the time being. But the fairly prompt response, at least in Germany, means there is a good chance that the damage can be confined to the particularly contact-intensive sectors. The planned compensation payments are not just important for those businesses that have already been hit hard and now have to close again, but are designed to prevent worse outcomes for the aggregate economy. In Germany many sectors, particularly manufacturing, can continue to operate with relatively fairly little disruption”, Köhler-Geib added. “I therefore expect only a moderate decline in economic output in the current quarter. But there is still a long winter ahead, and the downside risks are therefore high.”

“Over the summer, the German economy grew by 8.2% – a lonely new record that in normal times would be celebrated as a dream result! Unfortunately, these times are anything but normal. The historic growth spurt is little more than a mechanical counter-reaction to the previous even deeper slump: as a result of the shutdown of numerous economic activities, the economy crashed historically in the spring; with the successful containment of the first wave of Covid-19 infections and the resulting far-reaching withdrawal of restrictions from May onwards, a considerable part of this slump was made up for. But now the infection figures are already skyrocketing again. We will therefore only get through autumn and winter relatively unscathed if we break the swelling second wave in time. That is the aim of the new measures taken by the federal and state governments. Their success also depends on the contribution of each and every individual so that this partial lockdown suffices to break the new infection wave. I consider a success if we are able to prevent a further major decline in GDP in the winter half-year; in the best case scenario, economic growth would only flatten out considerably. To this end, I am counting on the recovery in industry remaining strong enough to compensate for the inevitable setbacks in the services sector.”

“SMEs in Germany, however, generally have strong financial resilience. In the past years, companies have built high levels of equity, which now benefits them. The average equity ratio even reached a new record high of 31.8% in 2019."

“Despite the comfortable starting position of most small and medium-sized enterprises in Germany, the coronavirus crisis will leave an imprint – not just on SMEs’ balance sheets but also in the minds of entrepreneurs. The actions of many might be guided by caution and restraint in the period ahead. It is important to respond to this with targeted economic-policy measures that reduce uncertainty while creating incentives to seize the opportunities presented by the crisis.”

KfW SME Panel 2020(PDF, 1 MB, non-accessible)

“Autumn has hardly begun and the number of people infected with corona is shooting up alarmingly. This shows that we are still in the middle of the crisis –economically too. The economic recovery in the summer may not hide this fact. The countermeasures introduced by the federal and state governments are necessary to prevent a second Germany-wide lockdown. As hard as the restrictions affect many, they will prevent worse. It is likely that the economic upturn will largely come to a standstill by the spring. As a result, unemployment is also expected to stagnate in the coming months or – if things go badly – increase significantly. The employment risks remain high, especially in customer-related economic sectors. The autumn and winter months will once again prove to be a particularly severe test for the hotel and restaurant industry, as well as for parts of the retail sector and the cultural industry. However, there are also sectors in which employment is still being built up during the crisis. This applies, for example, to the economic sectors of information and communication, education and training, healthcare and the construction industry. Next year, the upturn in the growth sectors in particular is likely to be slowed down by a shortage of skilled workers. For this reason, the unemployed and employees from crisis sectors who are willing to change jobs need to be supported in qualifying for occupations that require additional employees. It is also particularly important to win over the large number of short-time workers for future-oriented training.”

“The interaction of the pandemic and government guarantee programs is shaping the European corporate credit market. Overall, credit growth in September was stable at a high level for the fourth time in a row. However, this conceals very different developments in individual euro countries. While in Germany, the momentum slowed down significantly with a very calm flow of infections, the banks in the other three major euro countries again extended more funds to companies. In Spain and France, the increasing number of new infections was probably the reason. In the meantime, the economic impact of the pandemic is growing daily in this country as well. In the service sectors that have been particularly affected, such as hospitality, the financial bottlenecks and thus the need for credit are likely to increase again. In this difficult situation, the ECB, just like the governments, is now called upon to strengthen the confidence of companies and consumers by extending and selectively supplementing the crisis measures.”

“Everything seems like a déjà-vu experience. The number of infections is shooting up again and the containment measures are constantly being tightened. Some of our European neighbours are even ordering curfews and store closures again. It is therefore not surprising that the business climate is also clouding over. The speed of the increase in infections is alarming, but the situation is still different from the spring: thanks to the increased number of tests, the undetected cases are likely to have decreased significantly and it has so far been possible to better protect high-risk groups. We are still cautiously optimistic that the increase in new infections in Germany can be slowed down without the most economically damaging measures, such as comprehensive business closures. However, this also depends on the contribution of each individual. The manufacturing industry in particular is likely to come off better this time than during the first wave of infection, as it is likely that as few economic activities as possible will be curtailed among European trading partners. Nevertheless, the foreseeable restrictions mean a significant setback for the service industries, such as the hospitality sector in particular, which were already severely affected in the first wave.”

“The current KfW-ifo SME Barometer highlights the continuing rise in confidence levels in September as well, which is certainly good news that can allay excessive fears of an economic setback”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Nevertheless, the renewed, considerable increase in the number of new coronavirus infections is becoming a growing obstacle for the economy as the cold season begins. The health response and economic support measures must now focus on ensuring that the economic rebound will still continue at a satisfactory pace even after the foreseeable record growth in the third quarter. To a large extent, the German population itself holds the key to preventing renewed large-scale lockdowns by being sensible and considerate, and by consistently complying with infection-control regulations. What is raising growing concerns, however, is the spread of infections in many other important countries around the globe – particularly with a view to the domestic export industry and its focus on cyclical capital goods”, said Köhler-Geib.

KfW-ifo SME Barometer September 2020(PDF, 129 KB, non-accessible)

“The economic recovery noticeably improved the labour market situation in the summer. The feared rise in unemployment to above the 3 million mark appears to have been averted for the time being. Due to seasonal factors, unemployment should fall by the end of the year. However, we can assume that the number of infections will rise again in the autumn. This could lead to a further slowdown in the economic recovery. Setbacks are also possible if stricter government regulations on social distancing become necessary in Germany and Europe and consumers spend less out of fear of infection. A further slump in economic activity is unlikely, as people in Germany are generally behaving in a disciplined manner and the findings from the spring allow a more regionally targeted approach to the pandemic. Next year, the shortage of skilled workers will become noticeably more important again as a barrier to economic recovery. It is therefore crucial for the further recovery that short-time workers and the unemployed receive training in line with market requirements. Otherwise, there is a risk that qualifications will expire and the unemployed will be demotivated if they remain inactive for a longer period of time. Moreover, the crisis acts as a catalyst that accelerates structural change. The digital and ecological transformation places new demands on employees and companies, far beyond the automotive industry. For this reason, we must take seriously the risk that the underemployment created in the corona crisis could become entrenched without increased qualification and that the shortage of skilled workers could increase."

“Lending to European companies remained stable at a high level in August. However, in line with the stabilisation of the economic situation, I expect the credit market to calm down in the future. In order to cushion immediate financial distress caused by the abrupt corona shock, borrowing was a lifeline for many companies. Now, with the recovery, the focus is increasingly shifting to adapting to the changed realities. However, a renewed surge in demand for credit cannot be ruled out. The rising incidence of infections and new local containment measures are causing uncertainty to grow again. Therefore, largely unimpeded access to credit for companies with functioning business models remains an important goal.”

“The initially strong momentum of the economic recovery is ebbing down, the number of people newly infected with Corona is rising – an unhealthy mixture at the beginning of autumn! So the fifth business climate increase comes just in time as a signal of calming down. Nevertheless: the easy part of the recovery is over. Both health policy and economic policy efforts must now focus on ensuring that the economic improvement continues at a satisfactory pace even after the expected record GDP growth in the third quarter. It is largely in our own hands to avoid further large-scale lockdowns by exercising common sense, consideration and consistent compliance with infection control regulations. With regard to our export economy, however, I am somewhat concerned about the incidence of infection in many other important countries.”

“I assume that the Governing Council will largely maintain the current monetary policy course on Thursday. The monetary policy measures taken before the summer break have so far achieved their intended effect. In July, corporate loans in the euro area recorded one of the highest values in the past ten years, thus helping to cushion the crisis. In addition, the spreads between German government bonds and the bonds of other euro area countries are currently moving along quiet lines. At the same time, however, the pace of economic recovery has slowed down and economic policy uncertainty remains very high. In reviewing its monetary policy strategy, the ECB will also take into account the recently announced strategy adjustment of the US Federal Reserve.”

“After business sentiment shot up when the coronavirus restrictions were relaxed from May onwards, initially in record-breaking leaps, we are now seeing a clear reduction in the pace at which sentiment is improving”, comments Dr Fritzi Köhler-Geib, KfW’s Chief Economist, on the current findings of the KfW- ifo SME Barometer. “The easy part of the recovery is over. Continuing the trend towards pre-crisis levels of economic activity as autumn and winter approach is going to be tougher.” Export-oriented industry, in particular, will need to adjust to the growing demand-side headwinds. “As rates of coronavirus infection continue to increase rapidly around the world, uncertainty remains extremely high and it is putting a brake on companies’ domestic and international investment activity. Germany’s export industry, which specialises in high-quality capital goods, is feeling the impact of this particularly heavily.”

Furthermore, we are likely to see unemployment in Europe continue to grow in the short-term, which will in turn affect consumption and, in particular, sales of durable goods such as cars, for example. In Germany too, it is anything but certain that all those affected by short-time work will in fact be able to return to their original places of work. “For a seamless recovery, it is therefore important that as many people as possible use this phase of short-time work for professional development and, for instance, to improve their digital skills,” says Köhler-Geib.

“The high increase in long-term financing is good news for the stability of the economic recovery. Longer maturities give enterprises more financing certainty and allow them to distribute the weight of their losses from the crisis over longer periods. This improves the prospects for the long term continuation of their operations.”

KfW Credit Market Outlook September 2020(PDF, 88 KB, non-accessible)

“The economy has regained momentum. The situation and expectations have improved dramatically in all economic sectors since May. The rapid recovery is largely due to the largely stable income development. Gross hourly earnings paid by employers in the second quarter were 2.6% higher than in the previous quarter. This stabilises purchasing power during the crisis and supports private consumption and housing construction. However, not all sectors are participating in the upswing to the same extent, as is clearly apparent in the retail sector. In June, retail sales were already 5.9% higher in real terms than in the previous year. Sales in the textiles, clothing, shoes and leather goods segment were still 16.0% down on the previous year, however. And in the hotel and restaurant sector, sales were still down 42.2%on the same month. It is therefore much too early to give the all-clear and this also applies to the job market. There are still almost 3 million unemployed and over 5 million short-time workers and companies are still hesitant to hire. The greatest risk for the upswing is and remains the further course of the pandemic. The rising infection figures must therefore be taken seriously. If the infection rates threaten to get out of control again, tighter protective measures may become necessary – with serious consequences for the economy. It is therefore important to investigate where the new increase in infections in Germany comes from and what each individual can do about it. In order for the recovery to prevail, companies will also have to overcome their reluctance to hire again. The obstacles to this are reluctant hiring behaviour and difficulties in finding suitable employees – a situation that is exacerbated by declining immigration of foreign workers and declining labour force participation. All this is due to the crisis. For the further upswing it is important to remove barriers to starting work or training so that the economy is not slowed down by a shortage of skilled workers. Also with a view to 2021 and the following years, high priority must be given to securing the supply of skilled workers. Otherwise, demographic developments and weak productivity in Germany could become a serious obstacle to climate- and environmentally compatible growth.”

“The European corporate credit market continued its strong upward trend in July, lending only slowed down slightly compared to the previous month. We have made good progress in the economic recovery everywhere in Europe in recent months but the rising infection figures clearly show that we are still in the middle of the pandemic. Supported by government guarantees, bank loans therefore remain an essential instrument to enable companies to maintain their business operations. This is enormously important for stabilising economic development but it comes with side effects. The level of indebtedness of European companies will rise, reducing their financial scope for future investment and innovation.”

“This morning Destatis revised the historical slump in GDP to -9.7% in the second quarter and published its first estimate for public finances in the first half of the year. The Corona crisis has caused the national budget to slide deep into the red for the first time in eight years. That is as expected and a good thing. Public money has been well invested in the rapid and extensive stabilisation measures, as underscored by the continuing upswing in sentiment. The business climate improved in August for the fourth time in a row. This success must be maintained at any rate in view of the renewed significant rise in contagion. Reason, mutual care and strict adherence to infection control rules are the key to ensuring that the economic recovery continues. After all, the precrisis level is still a long way off, and the continuing global rage of the pandemic remains a major risk for us as an export nation.”

"With skills shortages increasing in Germany, SMEs are looking to go new ways in recruiting workers. In addition, the entry of digital natives with their specific communication behaviour into the workforce is a driver of increased social media activity. The contact restrictions imposed by the coronavirus crisis are likely to lead to a further surge in the use of social media to hire employees, since traditional recruitment measures such as open days or educational fares cannot take place at this time. In an international comparison, German SMEs are only in the lower mid-range in the use of social networks to recruit skilled workers."

To the publication Social media – a tool for SMEs to recruit talent(PDF, 94 KB, non-accessible)

“After plunging into an abyss in April, small and medium-sized enterprises have managed quite a decent relaunch”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The fact that businesses were able to avoid falling into a depression after the deep slump is also thanks to the decisive public health and economic policy response to the pandemic. Many small and medium-sized enterprises were able to ride out the lockdown with grants and assistance loans. Furthermore, the brighter sentiment is not driven by expectations alone but has been bolstered by an improved business situation again since June. After the historic slump in the first half, the course is set for strong growth in the summer quarter.”

However, headwinds are also gathering strength. “Continuing high global infection rates are hurting export-oriented manufacturing in particular. Given the enormous uncertainty and crisis-induced losses, many businesses will spread out or defer their investment plans. The recent rise in new infections in Germany also poses a risk to almost all sectors.”

“With the data released today, it is now official what immediate economic devastation the first wave of infection left behind in the eurozone. Yet there are significant differences between the countries. Where the strictest containment measures were taken, the economy has collapsed most deeply. As countries with above-average unemployment have been hit particularly hard, the economic gap in the euro area threatens to widen further. That is why it is so important for the economy and cohesion that the European Council was finally able to agree on a recovery fund. In addition, the decisive public health response has at least succeeded in containing the virus in Europe relatively quickly. A significant recovery was thus able to commence in May, which will become apparent in the current summer quarter. The recent increase in the number of cases, particularly in Spain but also in Germany and France, is the greatest risk. This is true even though new containment measures can probably be more targeted today and thus less harmful from an economic point of view than in the spring.”

“The Corona crisis is subjecting the German labour market to a stress test. In terms of gross domestic product, the low point of the economic crisis was probably reached in the second quarter. However, this will hit the labour market with a delay of several months, as some companies will still have to lay off some of their short-time workers. At 44.6 million, the average number of people in employment in 2020 is likely to be 700,000 lower than in the previous year. The peak in unemployment could be reached in the third quarter with around 3 million unemployed persons. By the end of the year, the upward forces could then also assert themselves on the labour market. The economic stimulus provided by the federal government's extensive economic stimulus package should make a noticeable contribution to companies investing more again and thus also creating new jobs. The annual average for 2020 should be around 500,000 more unemployed persons than in the previous year. The unemployment rate is expected to rise from 5.0% in 2019 to 6.1% in 2020. In 2021 it could then be somewhat lower again at 6.0% as employment increases. However, the risks are considerable. An essential prerequisite for an improvement in the labour market is that the infection rate remains low as a result of the protection measures and through common sense and consideration for other people. If a second wave of infection triggers an economic setback in Germany or in important foreign markets, job cuts may also increase. In addition, many companies are looking for new business models and want to reduce their costs in the longer term because of a continuing decline in earnings. This may also result in layoffs. This is why it is so important that everything possible is done to get the economy back on track, to tackle the structural challenges and to ensure environmentally and climate-friendly economic growth. We should all bear in mind that it is a matter of both preserving human life and securing our prosperity and jobs.”

“With -10.1% compared to the previous quarter, the collapse in gross domestic product in the second quarter of 2020 announced today is truly historic. The largest quarterly decline to date at the peak of the financial crisis with -4.7% was doubled, as the containment of the first wave of infection in the spring required a previously unimaginable shutdown of many economic activities. Nevertheless, the negative record is likely to be followed by exceptionally high growth in the current summer quarter, as the economy picked up quite quickly from May onwards with the gradual lifting of the containment measures. However, after the initially almost mechanical recovery from the supply side, the pace of recovery should soon slow down again. Export-oriented industry in particular must expect a strong headwind in view of the continuing high global infection dynamics. In addition, in view of the high level of uncertainty and the losses incurred as a result of the crisis, many companies will stretch or postpone their investment plans.”

"A three-fold change in the business climate in the same direction signals a turnaround – according to this well-known rule of thumb, Germany is now finally on the road to recovery, as business sentiment rose in July for the third time in a row. The economic start to the summer quarter has thus been successful. GDP growth is likely to be exceptionally strong in the third quarter, albeit after the economy collapsed historically in the spring as a result of the corona measures. I expect Destatis to announce a near double-digit percentage drop in GDP for the second quarter next Thursday. Despite the encouraging signs of late, it is too early to give the all-clear: the pre-crisis level will remain a long way off for the foreseeable future, and the continuing fierce rage of the pandemic in large parts of the world is an enormous risk for Germany as an export nation."

"After the strong increases of the previous months, a certain slowdown in the growth of European corporate loans was to be expected. This is not an alarm signal, as the easing of pandemic measures has helped to somewhat relieve the liquidity situation of companies and, through strong issuance activity in the bond markets, large companies have been able to find alternative sources of financing. Although the peak in credit dynamics has probably been passed, a functioning credit channel remains crucial for the recovery of the economy in the coming quarters after the corona shock. So far, unlike during the financial crisis, banks in the eurozone have largely been able to avoid tightening credit standards. The most recent survey of financial institutions by the ECB clearly shows how essential government loan guarantees were in this respect in the countries that were particularly hard hit. The exit from this important support measure should therefore be undertaken with caution."

"The latest economic data indicate that the economy in the euro zone has started to pick up again since May. Nevertheless, further development remains fragile against the background of a significant global increase in new infections. Due to a high under-utilisation of production capacity for the foreseeable future, price pressure will remain low for a long time. As a result, the high degree of expansion of monetary policy is appropriate. However, after the bonfire of innovative measures, the Governing Council will probably take a breather next Thursday. However, changes to individual parameters are quite possible. For example, the ECB could increase the allowance for excess reserves in order to further support the banks in the Corona crisis."

“Considering the significantly increased loan default risks due to the deep recession, the difficulties which SMEs are experiencing in accessing credit are still limited. During the global financial crisis of 2009, more than 40% of the surveyed small and medium-sized manufacturing firms complained about credit constraints. Financial institutions are in better shape today, and at the same time the comprehensive economic support measures are helping to reduce the negative effect on banks’ willingness to lend during the current crisis.”

“The trough of the recession which hit Germany, Europe and the world without warning as a result of the coronavirus pandemic now lies behind us with the second quarter. The June findings of the KfW-ifo SME Barometer demonstrate that businesses are climbing out of the deep cyclical low step-by-step”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Germany’s economy likely saw a nearly double-digit percentage fall in output from April to June, and it is now back on the path of recovery. But it is a narrow path where risks of renewed collapse lurk in spite of massive economic protection measures”, Köhler-Geib added. “The local increase in new infections demonstrates impressively how dangerous the virus still is, not just globally but in Germany as well. Let us hope that such local virus outbreaks can be contained in time with local quarantining and lockdown measures before they can spread. “It is crucially important that we remain vigilant and maintain discipline in complying with hygiene rules to prevent a renewed economic setback from a second wave of infections."

“The outlook for entrepreneurial activity in 2020 was positive but has been clouded by the coronavirus pandemic. I expect some of the start-up plans to be put off in response to the current threat facing the livelihoods of many self-employed professionals”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “But the crisis will also act as a driver of entrepreneurial activity. With unemployment rising as a result of the crisis, the number of necessity start-ups – new businesses created for lack of better income alternatives – will rise. It remains to be seen which effect will ultimately prevail.”

A closer look at the structure of entrepreneurial activity reveals positive trends. Innovative start-ups and fast-growth start-ups increased moderately (from 11% to 13% and from 24% to 25% of all start-ups). There was a noticeable increase in Internet-based and digital start-ups (from 25% to 32% and from 22% to 28%). “The trend towards more innovative, digital and Internet-based start-ups is positive because they create new markets, drive structural change and strengthen our economy’s competitiveness”, said Dr Fritzi Köhler-Geib.

KfW Entrepreneurship Monitor 2020(PDF, 623 KB, non-accessible)

"The business climate has improved significantly from a very low base in all economic sectors since the end of the lockdown. Most companies expect better business in the second half of the year, even though demand and supply chains are still impaired and concerns about the future are often still high. The revived business activity has enabled many short-time workers to extend their working hours again. Nevertheless, the number of unemployed people is likely to continue to rise in the coming months as there will be more redundancies and companies are hiring fewer people. As a result, the number of reported job vacancies in May was with 570,000, more than 200,000 lower than in the same month last year. Unemployment has especially increased among workers without vocational qualifications and young people. In the coming months it will be important to ensure that unemployment does not become entrenched and lead to permanent disadvantages. To this end, apprenticeships and training opportunities must be created in greater numbers. The conditions for this are not easy. Many companies are unable to provide training because of economic problems. And the need for social distancing poses more or less major challenges for companies willing to provide training. This is why innovative solutions are also needed for schooling and vocational training."

"The strong flow of credit to European companies has continued in the midst of the historic Covid-19 recession. This is a success of the comprehensive economic policy stabilisation measures. The aid for banks, companies and the economy as a whole has an effect beyond the direct beneficiaries and is mutually reinforcing. The interplay of two instruments is particularly important for maintaining an open credit channel: firstly, the ECB is providing targeted incentives for lending to households and companies with extremely attractive conditions for longer-term refinancing transactions (TLTRO-III). Right from the first round in June, demand from banks for these funds was enormously strong at over 1,300 billion. Secondly, the credit guarantees of the European states reduce the risk of losses not only for the financial institutions but also for the national economy. According to an analysis by the ECB, up to 20% of expected credit defaults can be avoided in this way".

“Companies are working their way step by step out of the deep recession valley. Their mood is rising strongly for the second time. The way back up, however, follows a narrow path on which, despite massive economic policy safeguards, one must always beware of the danger of falling. The recent increase in new infections is a powerful reminder of how aggressive the virus still is in Germany. It is to be hoped that local outbreaks can be contained in good time with local quarantine and lockdown measures before they spread to the rest of the population. In any case, vigilance and discipline in observing the rules of hygiene continue to be urgently required to prevent another fall. The new Corona Warning App is a useful building block in this respect.”

“The coronavirus crisis has a grip on Germany’s SMEs. The losses in turnover are serious and probably amount to a good EUR 250 billion in the months of March to May. The path out of the coronavirus slump will be long and arduous”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Looking ahead, though, we can be cautiously optimistic. With the government’s comprehensive coronavirus response and progress made in containing the spread of infections, and with the adjustments companies have made to their business models and product assortments, Germany is on a good path. What matters most now is to have faith in a sustainable recovery. The Federal Government’s new economic stimulus package provides welcome impetus for this.”

But Köhler-Geib also stressed the need to closely monitor the development of SMEs’ liquidity position. “A large number of small and medium-sized enterprises continue to feel great pressure on their liquidity, so the threat of insolvency has not been averted despite the relaxation of coronavirus restrictions.”

“The coronavirus pandemic and the disruptions it has brought to business activity left a clear mark on the first quarter already, and this will dominate developments in the corporate credit market until the end of the year. Economic output during the weeks of the lockdown in the second quarter was probably just 75-80% of the normal level. Even if the recovery has since begun, it is unlikely to climb back to the pre-crisis level until 2021. The funding requirements of businesses to overcome the shock therefore continue to rise, as does their demand for bank loans, the most important borrowing instrument. I expect new lending to businesses to increase by around 10% in the current quarter. In addition to drawing on credit lines, newly negotiated bridging loans – which include the KfW coronavirus support programmes – are likely to become just as important as the suspension of repayments.”

“The findings of the KfW-ifo SME Barometer since March resemble a rollercoaster ride with a steep downward slide followed by a comparatively short climb in May. Even if the current sentiment improvement was exceptionally strong from a historic perspective, it is not more than a sigh of relief over the most recent slowing of the coronavirus crisis, which now permits businesses to take a less pessimistic view of the near future. Germany is on a good path with its comprehensive coronavirus response, economic stimulus package and successes achieved in containing the spread of infections. But getting out of the coronavirus slump will take a long time. Hygiene requirements, which must remain in place, have to be complied with in order to prevent further outbreaks. New confidence in the future is the key to a successful outcome.”

“The business climate has finally arrived in the corona valley. The historic decline in the assessments of the current situation as a result of the lockdown – necessary to contain the pandemic – under-scores the fact that we must prepare ourselves for the second quarter to see the worst slump in economic output since the Federal Republic of Germany came into existence. I expect GDP to decline by between 10 and 15% compared to the previous quarter. Even though business expectations do not yet inspire hope, I am confident that we will see the beginning of a recovery as early as the second half of the year. The prerequisite, however, is that we are now very prudently restarting economic and social life without jeopardising the health successes. The comprehensive protective umbrella provided by the Federal Government, the federal states and KfW is helping the enterprises to maintain their productive potential beyond the crisis as intact as possible.”

" In order to cushion the pandemic-induced collapse in corporate sales, state-supported aid loans play an important role in European governments' policy packages. However, whether the credit-based funds actually flow depends above all on the willingness and ability of banks to shoulder the rising credit risks. According to EBA estimates, losses for financial institutions could amount to 3.8% of risk-weighted assets. That is significant. So it is good news that eurozone financial institutions have reported another strong expansion in corporate lending. Now it is paying off that the banking system has been crisis-proofed by stricter regulatory requirements after the experience of the financial crisis. Getting the economy back on track after the abrupt shock has subsided, however, will take a lot of patience. To ensure that the necessary funding is made available for this purpose, further targeted risk relief for banks in their lending activities is advisable."

“Exceptional times require exceptional monetary policy measures. This applies to the ECB as well as the Fed or Bank of England, which have all intervened heavily in the sovereign bond market since the corona crisis. At its meeting on Thursday, the Governing Council may discuss whether the ECB capital key should be abandoned as a medium-term guideline for securities purchases under the pandemic emergency programme PEPP. As the corona shock hit individual countries such as Italy, Spain and France particularly hard, they also need targeted support. The interest rate level in Germany would then be less affected. On the other hand, the Federal Constitutional Court, and also the European Court of Justice, have defined the orientation towards the capital key and a limited volume of securities purchases as important boundaries to monetary public financing. A "recovery fund" in line with the Franco-German initiative or the proposals of the EU Commission would in any case take some pressure off the central bank.”

“The companies acknowledge the easing that has begun with a sigh of relief – and rightly so! Thanks to the discipline of the population and the general acceptance of containment measures necessary for public health, also on the part of companies, Germany is on the right path. However, this path out of the Corona Valley is still a long one and will only run smoothly if the further necessary hygiene requirements are met. To complete it successfully, new confidence in the future is the key. In order to strengthen and consolidate the coming recovery, it is therefore essential to quickly draw up a growth and investment programme that takes into account the structural challenges facing the German economy and conveys a clear vision of sustainable economic development.”

“The coronavirus crisis in Germany abruptly ended the very good sentiment in the VC market”, said Dr Friederike Köhler-Geib, Chief Economist of KfW. “Experience has shown that in times of crisis, VC investors focus on portfolio maintenance and put off new investments for the time being. That puts downward pressure on the level of investments. But now in particular, it is important not to leave the very good start-ups that are still searching for VC investors out in the rain. Otherwise, they will have difficulty getting through the capital-intensive time to market. Losing a start-up generation would be a heavy hit. The very good fundraising climate of past years should actually make it possible to bridge this situation.”

German Venture Capital Barometer 1st Quarter 2020(PDF, 131 KB, non-accessible)

“With minus 2,2% in the first quarter, Germany still got off lightly. This reflects the fact that the lock-down came later than in the other euro countries and was also less comprehensive. Most business closures were only ordered from the last week of March onwards. From that point on, economic output is likely to have been 20–25% below normal levels for several weeks, with interruptions in the manufacturing sector, which was only indirectly affected, also playing a major role. We must therefore expect much worse figures for the second quarter. For the year as a whole I expect a decline of -6%. At least we should already have passed through the Corona Valley as long as a second wave can be avoided. Nevertheless, the road back to pre-crisis levels is a long one, especially for manufacturing, which has to struggle with a massive global investment slump due to the enormous uncertainty.”

“Municipalities already had high investment requirements before the coronavirus crisis”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “We face a catastrophic prospect if their budgetary scope now shrinks and investments are therefore put on hold. Germany needs public investment in modern infrastructure in order to overcome the consequences of the crisis and as a prerequisite for maintaining the country’s prosperity. Adapting the infrastructure to climate and demographic change alone is a Herculean task.”

KfW municipal survey: Slump in revenues expected, investment under pressure(PDF, 143 KB, non-accessible) (only in German)

“The coronavirus crisis has hit Germany like a bolt of lightning”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The rebound is likely to begin already in the second half of the year, but we probably won’t return to pre-crisis levels until autumn of 2021. The cost of the crisis in lost economic output will then be roughly EUR 300 billion.” That is roughly equal to the gross domestic product of Denmark.

“Without the swift fiscal and monetary policy response, the recession would be even more devastating”, said Köhler-Geib. “Grants and bridging loans as well as a range of adjustments to banking regulation as well as rental and insolvency legislation are helping the business community. The short-time work allowance is reducing fixed costs, protecting jobs and bolstering domestic demand. A large portion of businesses is likely to come out of the crisis with bruises, but they will survive. However, all measures can only bridge the lockdown situation. We must now find ways to protect both lives and livelihoods by conducting rapid tests, tracking infection chains and putting in place behaviour protocols.”

KfW Business Cycle Compass Germany and Eurozone(PDF, 109 KB, non-accessible)

"Without a doubt, the findings of the KfW-ifo SME Barometer for April are depressing. On average, all individual indicators surveyed have fallen by around ten times the typical monthly variation”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “This shows us impressively the far-reaching economic impact of the mandatory shutdown of broad areas of life which was necessary to protect public health. As the historic slump in the business climate is due to the very special circumstances of the coronavirus pandemic and not driven by any genuinely economic factors, sentiment should be able to rebound relatively swiftly once we can ease our foot off the brakes. All confidence-building measures that serve equally to protect human life and livelihoods will be crucial, such as rapid testing, reliable contact tracing and hygiene strategies. After all, people will not fully participate in economic and public life again until the risk of contagion is as low as possible and predictable. I am confident that we saw sentiment bottom out in April thanks to the comprehensive coronavirus containment strategy, the successes achieved since March in stopping the spread of infections, and the now announced or already implemented easing of restrictions. We can expect economic growth to start to rebound in the second half of 2020.”

“Digitalisation is increasingly reaching all areas of the German SME sector, but the vast majority of small and medium-sized enterprises continue to take small steps”, Dr Fritzi Köhler-Geib, Chief Economist of KfW Group, summarised. “The ongoing coronavirus crisis will mark a turning point and act as a catalyst of digital transformation in the SME sector. The competitive advantages resulting from digital business models, products and processes are now becoming particularly clear. They have allowed the uninterrupted operation of many businesses that would otherwise have ground to a halt because of the coronavirus restrictions. Many businesses are now suddenly forced to go digital. They are trialling work-from-home arrangements and virtual cooperation, setting up digital sales platforms as shops and restaurants remain closed, or are replacing paper-based processes with digital ones. Much of this will remain after the crisis – and grow.”

KfW SME Digitalisation Report 2019(PDF, 865 KB, non-accessible)

“The labour market is under the spell of the Corona crisis – and this will continue throughout the year. Business closures, business restrictions, lack of demand, disrupted supply chains and travel restrictions add up in their impact and have triggered a deep global recession. In Germany, more companies than ever before have announced short-time work. Unemployment has also risen considerably, although the increase has so far been limited thanks to the extensive expansion of short-time work benefits. Future developments depend heavily on political decisions in Germany and abroad. Among other things, these are guided by how the infection rates develop, how well even relaxed conditions are adhered to and how the conditions affect the economy. The easing in May is an encouraging first step, which is already improving the financial situation of many companies and employees.”

“The flash estimate for growth in the euro area over the first quarter provides the first hard economic data, which also include the effects of the corona crisis in March. It can be assumed that the euro area was still growing at an average pace in January and February. The big slump only started when the pandemic spread to Europe and the various national lockdowns were implemented. From the 3.8 % fall in GDP in the first quarter, it can be concluded that the containment measures have stifled the euro area economy by an average of 17 % in the last three weeks of March. The figures from the first quarter are therefore only a taste of what we can expect in the second quarter. We expect a slump of around 15 % and a gradual recovery from this low point.”

"The March ECB data on credit and monetary developments clearly show the economic impact of the pandemic. Monetary growth has accelerated sharply, mainly driven by an expansion of credit to the corporate sector. Overall, European banks provided 5.4% more funds to companies than a year ago. In February it had been only 3%. The immediate impact of the pandemic at the beginning of the European outbreak is reflected less in credit growth itself than in its acceleration. This is the strongest pace of growth in a month in lending to businesses in the euro zone to date. I see this as a positive signal, as banks are lending to businesses. It shows that government loan guarantees, flexibility in bank regulation and the ECB's ample liquidity are working. This is a major contribution to limiting the number of corporate insolvencies and minimizing the longer-term damage caused by the Corona crisis."

“The reported decline in GDP in the first quarter compared to the previous quarter was, at an annualized rate of 4.8 %, even clearer than already feared. This shows the severity of the recession there, as the decline essentially results from the second half of March alone. For the current second quarter, a far more significant slump in economic activity is already apparent. It is unlikely that there will be a very strong rebound in the second half of the year. Although the Americans are and will remain very willing to consume and could therefore meet the easing of the containment measures with stronger demand than consumers in other parts of the world do, the catastrophic situation on the US labor market will significantly dampen this effect. However, in my opinion one advantage remains for the US economy in the recovery: The US is less interconnected internationally than Germany, for example, and therefore less exposed to recessions in other countries. Looking at the year as a whole, however, the US will not be able to avoid a noticeable decline in GDP.”

“With its substantial asset purchases, the ECB is doing all it can to keep the monetary transmission channel open. To do so, it needs the greatest possible flexibility. The ECB's Governing Council will therefore probably discuss an expansion of the "PEPP" purchasing program this week, especially since other major central banks are currently making much greater efforts in terms of "QE". This Monday the Bank of Japan also raised its limit on government bond purchases. The PEPP increase at the moment would be a precautionary measure, but it would presumably mean further relief for the government bond market. Last week, the ECB eased the requirements for collateral in repo transactions. The decisions made by EU leaders last Thursday show that governments and the ECB are working in the same direction in crisis management.”

“The business climate has finally arrived in the corona valley. The historic decline in the assessments of the current situation as a result of the lockdown – necessary to contain the pandemic – under-scores the fact that we must prepare ourselves for the second quarter to see the worst slump in economic output since the Federal Republic of Germany came into existence. I expect GDP to decline by between 10 and 15% compared to the previous quarter. Even though business expectations do not yet inspire hope, I am confident that we will see the beginning of a recovery as early as the second half of the year. The prerequisite, however, is that we are now very prudently restarting economic and social life without jeopardising the health successes. The comprehensive protective umbrella provided by the Federal Government, the federal states and KfW is helping the enterprises to maintain their productive potential beyond the crisis as intact as possible.”

“We are launching the new KfW ifo Credit Constraint Indicator in troubled times but at the right moment”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “it will give us answers to the question whether SMEs will continue to have access to credit even during the coronavirus crisis. The share of enterprises currently in loan negotiations also allows us to identify trends around credit demand. The measures required to contain the pandemic have brought broad sections of the economy to an abrupt standstill. In order to prevent longer-term damage and enable the economy to recover quickly, a functioning supply of credit to businesses through the banking system will be crucial. The liquidity assistance being provided with KfW’s participation is therefore an important contribution to the German Federal Government’s overall package of measures”, said Köhler-Geib.

“Start-up activity in Germany picked up again in 2019 for the first time in five years. The year 2020 will show whether an increase in necessity start-ups or a decrease from the discontinuation of start-up plans will predominate, given the deep anxiety which the coronavirus crisis is causing for self-employed persons in particular”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “State liquidity aid and support for short-time work will help businesses and self-employed persons for now. What is also encouraging is that many self-employed persons are reinventing themselves out of necessity and adapting their business models to the acute challenges. But what is crucial is that all contribute with their behaviour to keeping the current state of emergency as brief as possible. More will then get through this crisis.”

"Even if the figures now published do not reflect the effect of the corona crisis, there is nothing to sugarcoat the current situation. In addition to disease, there is a serious loss of production and income, which could last for several weeks or months. However, for many employees in Germany the effects will be limited to temporary losses of work and earnings. This is not least due to the decisive measures taken by the German government. In addition, in view of the shortage of skilled workers that has been observed for some time, many companies are very interested in keeping their employees on the payroll, especially in order to be able to meet demand quickly during a recovery.

As in the financial crisis, the German government has considerably expanded the allowance for short-time work. This cushions loss of earnings and relieves companies of wage costs and social contributions. In addition, the Federal Government and KfW have launched financial aid packages of unprecedented dimensions. These help particularly affected enterprises overcome liquidity bottlenecks and protect them from insolvency. Of course, this also helps to avoid a sharp rise in unemployment.

We should be clear about one thing: How long the current state of emergency will last depends on people adhering to the restrictions imposed by politics on their working and social lives. This not only saves lives but also makes a decisive contribution to our economy overcoming the crisis as quickly as possible and largely unscathed."

"The ECB publishes the latest figures on European bank lending with the usual delay of four weeks. In times of Corona, that's an eternity. The February figures do not yet reflect the effect of the pandemic. In order to limit the foreseeable economic consequences, access to credit must remain open for financially sound companies and households. The chances are good, as supervisors, monetary policy, governments and promotional banks are working hand in hand to increase financial institutions' scope for lending. The capital relief provided by European banking supervision alone will release enough capital to allow additional bank loans of up to EUR 1.8 trillion to be granted. This represents around 15% of the outstanding loans to the private sector in the Eurozone.”

“The slump in the preliminary ifo business climate is inevitable, because the economic costs of the corona crisis are omnipresent. Due to the social distancing to contain the virus many service companies have to temporarily stop business completely. But industry also suffers from a slump in demand, the absence of employees and disrupted supply chains. It is easy to imagine that economic output will slump by 10 to 15 percent in the second quarter. The main problem is the enormous uncertainty as to when a return to normality will be possible. The main thing now is to ensure that companies do not go bankrupt but are put into a kind of hibernation with reduced or no business activity until the virus is under control. Then we might be able to achieve the same level of economic activity in a year's time as at the beginning of this year. The Federal Government has ensured that KfW, together with the banking industry, can provide companies with liquidity quickly and effectively.”

"The coronavirus outbreak in Europe has completely changed the situation in comparison with the last ECB decision on 23 January. At that time there was hope that the economic weakness in the euro area would end but now there is no longer any question of that. Instead, worst-case scenarios are currently being played out on the financial markets. The Governing Council will make a constructive contribution to mitigating the consequences of the virus outbreak on the financial and real economy. Financial conditions remain, for the most part and the time being, still very favourable. A further interest rate cut would therefore have more of a symbolic value and would signal that central banks around the world are pulling in the same direction. In order to ensure that financing remains cheap throughout the euro area, the ECB could increase its purchases of securities as long as the fears of a virus persist. In the short term, however, liquidity aid and support for short-time working will probably be key for companies – and this is where governments come in.”

Last year, China was not only the third most important destination of German exports but, above all, the main country of origin of German imports. “SMEs’ stronger focus on the German and European internal market makes them less susceptible to global developments. But even if their confidence remained strong in February, they are not immune to the effects of the coronavirus outbreak. Ever since the virus began to spread in Italy, we have had to expect a further dampener to be added to the already subdued economic momentum in Germany”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

KfW-ifo SME Barometer February 2020(PDF, 120 KB, non-accessible)

"The signs point to further declining inflation: crude oil prices have fallen and economic momentum is only moderate, now with an additional damper from the coronavirus. We are thus heading for inflation rates of less than one percent in spring - unless virus-related disruptions on the supply side drive up prices in the short term. In this environment, the ECB should continue to provide very fa-vourable financing conditions, but should not relax them any further. Possible liquidity problems of companies due to the consequences of the virus should be addressed differently.”

“The unemployment rate has hardly changed thus far but the economic weakness is increasingly affecting the labour market. This is being felt to varying degrees in different economic sectors. While the number of employees in the manufacturing sector is falling slightly, it continues to rise in the service and construction sectors. The health care, real estate and information and communication sectors are showing the largest employment gains. On the other hand, employees in temporary employment are particularly affected by job cuts. At the end of 2019, there were around 80,000 fewer temporary workers than in the previous year. This represents a decline of 10%. Domestic consumption and construction investments will remain the pillars of the economy for the time being. This results from the good employment situation and noticeable wage increases. Real wages rose by an average of 2% in 2019.”

“Corporate lending in the euro area stabilized at the beginning of the year. Following the positive development of European consumer confidence and the purchasing managers index, this is another encouraging signal for the economy. However, the economic effects of the coronavirus are yet to be seen. Production stoppages due to the delay in deliveries from China may even temporarily lead to increased financing requirements to bridge liquidity bottlenecks. Reports of stronger growth in the credit market should therefore be treated with caution in the coming months.”

KfW Research therefore expects GDP to grow by only 0.8% in all of 2020 (previous forecast: +0.9%). In its initial forecast for 2021, KfW Research predicts a 1.3% increase in growth.

KfW Research bases its forecast on the assumption that the coronavirus epidemic will remain mostly confined to China and will abate in several weeks. After that, the Chinese economy should return to normal relatively quickly before any massive disruptions occur in global value chains. The downward risks of the novel virus are substantial, however. “Should the SARS-CoV-2 epidemic continue for longer and impact other regions of the world more heavily, it would raise the likelihood of serious consequences for international trade and value chains, to which German industry is particularly exposed. This is why I am concerned about the situation in Italy”, warned Dr Fritzi Köhler-Geib, Chief Economist of KfW. With a view to 2021, however, Köhler-Geib sees good reason for an economic recovery. “Global economic growth should be slightly higher again next year, giving our exports new impetus. German industry should then grow a bit more strongly again, as it will benefit from more favourable international demand. That will stimulate business investment. At the same time, the partial elimination of the solidarity surcharge from 2021 will strengthen consumers’ purchasing power.”

“The ifo business climate for February was eagerly awaited, as it offers a first impression of how strongly the corona virus is worrying German companies. So far, there have been reports from individual companies but there is hardly any reliable data on the effects on a broad scale. The focus is on the internationally intertwined manufacturing sector, which reported a marked improvement in sentiment in January and now surprisingly reports a renewed improvement in the business climate. Nevertheless, it is to be feared that German industry will be adversely affected if suppliers from China remain at a standstill for some time to come as a result of the corona virus. Experience shows that there is a catch-up movement after economic shocks such as the corona virus but this is probably not enough to compensate for the entire loss of growth within a year's time.”

“SMEs are increasingly withdrawing from innovation activity. That is a dangerous development for the sustainability and international competitiveness of the German economy. After all, innovation plays a major role for employment, growth and productivity. The decline in imitative innovations is also a problem. Innovations will not have economic impacts until technological progress is realised across the economy as a whole. We also need to further reinforce the development of new-to-market innovations and new technologies. Given the ambitious innovation strategies being pursued by other countries, Germany will have to step up its research efforts. German business cannot afford to rest on the laurels of being on the cutting edge of technology but must secure its pioneer role and develop technologies for the future.”

“The overall economic stagnation in the fourth quarter is already a small success, considering that industrial production alone shrank by 2.3%. With the hope of recovery, we must at least be patient until spring. At least for the first quarter, there are signs of a noticeable slowdown in the Chinese and thus also the global economy as a consequence of the corona virus. The extent to which this is also reflected in growth for the year as a whole depends on the severity and duration of the slump. The potential effect on the internationally highly interdependent German economy comes through two channels: on the one hand, because of the short-term drop in demand from China and, on the other hand, because of possible disruptions in the cross-border value chains.”

The Chief Economist of KfW, Dr Fritzi Köhler-Geib, commented on the findings of the survey as follows: “Although digitalisation has gathered momentum in the SME sector in the past years, one obstacle is becoming increasingly clearer. The digital skills of the workforce are lagging behind the developments. Further training is the most important strategy to solve this but is too often neglected for cost and time reasons. Digital learning formats have improved technically and didactically in the past years and can stimulate further training in Germany. E-learning enables people to learn at any time or place, making it particularly well suited for the needs of small businesses.”

“Considering the adverse global economic conditions, the euro area has still been holding up well in 2019. After all, the monetary union has grown twice as fast as Germany alone. However, even in the euro area growth was no more than meagre at the end of the year. Now the new coronavirus is adding to the strains. So far we assume that the consequences for Europe will remain limited and, as with previous infections, will only have a short-term negative impact on economic activity. Recently, there have also been growing signs that the industrial sector is stabilizing. Therefore, economic momentum should regain strength in the course of this year. However, the pace of growth will hardly be sufficient to drive inflation permanently towards the ECB's 2% target. Instead, the rate of inflation should gradually decline from the 1.4 percent reported today in the coming months.”

“The Brexiteers will have a splendid break-up party on Friday night, which will be as hard to bear for their almost as many pro-European compatriots as it is for me. I am convinced that 1 February 2020 is a memorable day for the people of Europe, no matter which side of the English Channel they are currently living on. Over the past three years, Brexit has already tied up a great deal of resources in the EU and its Member States that could otherwise have been put to far more productive use in tackling pressing economic, social and environmental challenges. This process is not yet over. In the forthcoming negotiations, it is important to develop not only fair competition rules but above all a framework for future relations between Europe and the UK that are as close as possible and at least minimise the long-term damage to both sides. Ideally, this could even become a model for other non-EU countries that, for various reasons, cannot or do not want to be members of the EU. In any case, in the future, Europe will only succeed in maintaining its global position on a par with the US and China if it stands together and pools its forces.”

“Most employees in Germany will still not need to worry about their jobs in 2020. However, the eco-nomic weakness will not leave the labour market unaffected: Unemployment has risen slightly since May last year, the number of cyclical short-time workers has risen to 50,000 and the number of people in employment is growing more slowly – despite the continuing shortage of skilled workers, especially among construction workers, geriatric nurses and IT specialists. A reversal of the weak labour market trend is not expected until the end of the year at the earliest. It is generally expected that the global economy and German exports will gradually recover over the course of the year. However, things could also turn out differently. Foreign trade risks remain the Achilles' heel of the otherwise successful German export industry.”

“Since last summer, the European corporate loan market has continuously lost momentum. I currently see the reasons for the slowdown mainly on the demand side. This is also supported by the latest ECB survey of European financial institutions, which reported a decline in demand for the first time since the end of 2013. In view of the cloudy economic outlook and political uncertainties, companies are increasingly holding back on investments and borrowing, despite still very good lending conditions. In addition, banks are also becoming somewhat more cautious. However, low margins and ample liquidity continue to provide strong incentives for expanding the volume of credit. In any case, the ECB is likely to use the noticeable cooling as an argument for continuing its low interest rate policy.”

“At the beginning of 2020, the mood in German companies is somewhat gloomier again. Although this came as a surprise, it was not entirely without reason. The partial agreement in the US-Chinese trade dispute and the orderly withdrawal of the UK from the EU merely eliminate the immediate downside risks, but they do not yet create any real stimulus for the economy. New rifts are likely to open up in the forthcoming negotiations on future UK-European relations, which will cause some uncertainty. In addition, an end to the industrial recession, which has already lasted one and a half years and is thus the longest since reunification, is only dimly visible, while construction and services are showing unexpected signs of fatigue at the beginning of the year. The economic stalemate continues!”

“The Fed has recently communicated very clearly that the current key rate level is appropriate and that there are high hurdles for taking further monetary action. Accordingly, the Fed will leave its target rate range unchanged next Wednesday against the backdrop of a solid economy and moderate inflation rates. As with the ECB, the Fed's attention is currently focused on the revision of its monetary policy strategy. Above all, I believe that an adjustment with regard to the price target is desirable: Measured against its preferred measure of inflation - the core price index for personal consumption expenditures - the Fed very rarely reached its target rate of 2 % after the financial crisis. And an even greater challenge is the quantification of the employment objective which is closely linked with the assessment of the inflation-neutral unemployment rate. The current phase of wait-and-see policy is an ideal environment to push these strategic issues forward.”

"Economic data is developing in the right direction. In particular, business expectations in the manufacturing industry have risen noticeably in view of the de-escalation in the trade dispute between the USA and China. Therefore, no further easing of monetary policy is required at present. However, we are still miles away from a tightening process. Consequently, the ECB’s press conference on Thursday will revolve around the announced revision of the central bank’s strategy. Christine Lagarde will not anticipate the possible outcomes of the working groups. But we think it is likely that the ECB's inflation target will eventually be made more flexible – especially as we can obviously live quite well with somewhat lower inflation rates. In this case, extreme monetary policy measures should occur less frequently in future.”

“The very long upswing came to a virtual standstill in 2019; with real growth of 0.6%, Germany fell considerably short of its potential. Solid domestic demand alone saved the economy from recession last year. By contrast, the difficult foreign trade environment meant permanent stress for German industry, which also has to cope with the necessary structural change towards environmentally friendly products and production processes. Although the foreign trade burdens are likely to ease in the course of 2020, they will not disappear. In addition, there are geopolitical risks arising from the US-Iran conflict that are difficult to calculate.

Demography, climate change and digitalisation will present Germany with epoch-making challenges in the 2020s that have now begun. The more resolutely and rapidly these are tackled, the better. Investments in the digital and physical infrastructure, innovation and education are the key to this. There is ample fiscal space, as the huge government surplus of 1.5% of GDP underlines.”

“Despite low interest rates, the weak economic momentum, the industrial recession and multiple political uncertainties have dampened the appetite for new loans – among both banks and businesses”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The forces on both sides of the credit market are currently pulling in the same direction and dragging down growth momentum. Nonetheless, thanks to the healthy balance sheets of German enterprises, banks should continue to be ready to bridge liquidity bottlenecks that may occur in the event of unexpected developments. Sharp increases in short-term lending thus remain within the realm of possibility. But in order for a trend reversal in the credit market to be sustainable, economic growth will have to pick up noticeably and the political disruptions that are making it hard for businesses to plan will have to at least decrease. That is unlikely to occur before the middle of next year”, added Köhler-Geib.

KfW Credit Market Outlook December 2019(PDF, 102 KB, non-accessible)

Dr Friederike Köhler-Geib, KfW’s Chief Economist, sees further potential for development: “The German economy can no longer afford to neglect the potential of women – at all levels. We are facing a skills shortage and the working-age population will shrink. It is therefore highly desirable for more women to occupy the executive floors of SMEs. Not least, greater mobilisation of women can help to ease the more challenging situation of business succession in the future. Germany’s SMEs need more women in management.”

Zu "Chefinnen im Mittelstand: Anteil der Frauen in Führung steigt nur leicht"(PDF, 95 KB, non-accessible)

“It is much too early to give the all clear, the threat of recession is not yet over”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW, on KfW Research’s current economic forecast. “The German economy is and remains vulnerable to negative surprises. The main risk factors are a possible re-escalation of the US-Chinese trade conflict and the residual risk of a disorderly Brexit, but also Italy’s high government debt. What is positive, however, is that the scope of Germany’s fiscal policy enables any damage from recession to be contained.”

KfW Business Cycle Compass Germany November 2019(PDF, 149 KB, non-accessible)

"Real interest rates are decisive for financing and investment decisions. These have been negative on the German capital market since 2016. This has also frequently been the case with the US dollar in the past. So negative real interest rates are not really new. Since early summer, however, nominal interest rates have now also slid below zero almost across the entire yield curve - for German government bonds and in the euro swap market. This is visible to everyone. Since structural factors are among the reasons, it is likely that this environment will accompany us for some time to come.

KfW is facing up to these realities by making it possible to pass on its favourable refinancing conditions even in this environment - so that it can continue to provide optimum funding.

The main reason for KfW's promotion is independent of interest rate levels. This is because KfW becomes active when the market does not produce sufficient results. Take the example of climate protection: a stable climate is a public good. The market does not reflect this. Interest rates for financing investments that make a positive contribution to climate protection are just as high as others without promotion. This is independent of whether capital market interest rates are quoted at 5%, 0% or -1%. Another example: reduced-interest loans for SMEs, which have a relatively poor chance of success in refinancing due to asymmetric information, also retain their justification in a negative interest rate environment. Or even cheap loans for innovators, who can always only collect part of the pensions of their innovations, remain sensible.

Conclusion: Development banks and development loans are also in demand in a negative interest rate environment!"

Further information