Upbeat mood of German SMEs contrasts with growing uncertainty among large enterprises

• KfW-ifo SME Barometer shows small and medium-sized enterprises more confident on the back of much improved situation assessments
• Large-scale enterprises more pessimistic about future business developments
• Employment and price expectations on the up
• Vigorous real first-quarter growth

After a brief drop in January, the business climate of German SMEs improved noticeably in February, climbing 1.7 points to 21.2 balance points. The last time this indicator was higher was in mid-2011. The continuing flow of positive hard economic data in Germany has generated much more confidence on the executive floors of small and medium-sized enterprises. The situation of large-scale enterprises is very different. They view the international political risks with growing scepticism. The sentiment gap between SMEs and large-scale enterprises which closed only recently is thus widening again.

This substantial rise in SME confidence was driven by their assessments of their current business situation, which improved very significantly by 3.9 points to 33.4 balance points. That was the second-best monthly result since German unification and is indicative of vigorous first-quarter economic growth. At the same time, SMEs' business expectations stagnated (-0.2 points to 9.2 balance points). This development is understandable given the many risks and the already very positive situation assessments, the point of reference, and the expectations.

Among large enterprises, the uncertainty that was already palpable in January continued at a rather more subdued pace. Their expectations indicator dropped by 2.7 points to now just under 2.5 balance points on average. They rated their current business situation very positively as well, however (+1.8 points to 30.1 balance points). As a result, their business climate indicator dropped only by a moderate 0.5 points to 16.1 balance points in February. At the same time, however, it remains far below that of SMEs.

More good news is coming from the German labour market, however, which can look back on eleven years of uninterrupted job creation already. There is no end in sight even if the increase in the workforce will probably continue at a slightly slower pace. The continuing upward trend on the labour market is also corroborated by the employment expectations of the KfW-ifo SME Barometer, which rose strongly in February among SMEs in particular (+2.4 points to 14.8 balance points) as well as among large enterprises (+0.9 points to 17.8 balance points). Businesses' unwavering readiness to create jobs attests to the fact that they generally expect the upturn to continue even beyond the end of the first quarter despite the current risks.

Sales price expectations are now clearly pointing upwards as well – at similar rates in both enterprise size classes (+1.7 points to 8.7 balance points in SMEs and +2.0 balance points to 7.3 balance points among large enterprises). From a monetary policy perspective, a higher inflation rate is desirable and an important prerequisite for reversing the ECB's extremely expansionary course. But higher inflation also means that real wage growth will not be as strong this year as last. That will reduce private consumption growth which, in turn, may have a dampening effect on the retail business climate.

Dr Jörg Zeuner, Chief Economist of KfW Group, commented: "The German economy is set to grow strongly in the first quarter of 2017. The consistently very high levels of business situation assessments are particular signs of this. I cannot rule out the possibility that the 0.6% growth we recently predicted for the first quarter may even be higher. It is less clear what will happen after that; in any event, businesses' more sceptical expectations reflect a degree of concern."

The current KfW-ifo SME Barometer can be downloaded from

www.kfw.de/mittelstandsbarometer