KfW Research: SME sentiment is picking up – trend reversal or just a temporary high?

• Business climate index has surged
• Infrastructure package is boosting confidence
• US tariffs threaten recovery

The business climate in the German SME sector posted a decent jump in March, climbing 3.9 points to -17.6 balance points. The index remains well below the long-term average represented by the zero line, but even so, the upward trend in March was 1.5 times the average monthly variation.

What drove the positive trend were the six-month business expectations of small and medium-sized enterprises. They improved by 7.4 points to -15.9 balance points, which was 2.3 times the usual average monthly variation. Current situation assessments, on the other hand, only moved sideways, rising marginally by 0.3 points to -19.7 balance points.

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

“It is true that the fiscal package put together by the Christian Democrats and the Social Democrats did not provide such a massive boost in sentiment among SMEs in Germany as it initially did in the financial market. But the improvement in expectations does indicate it has been received favourably”,

said Dr Philipp Scheuermeyer, economist at KfW Research.

“However, the improvement in sentiment that has only just begun is under threat again already during the current month from the tariff increases announced by the US. Even if most German SMEs are more focused on the domestic market than large enterprises, they will also feel the tariff increases through their relationships with suppliers and service providers.”

Business sentiment among large enterprises also increased in March – by 2.0 points to -24.1 balance points. As expected, the construction industry showed the largest sentiment improvement. Most of the higher upcoming infrastructure expenditure will presumably go to the large underground construction firms.

Among SMEs, sentiment improved primarily in the services sector, rising 6.0 points. Architecture and engineering firms in particular could benefit from rising infrastructure investment.

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

Where does the German economy stand today? What does the country need to become future-proof? KfW Research explores these questions in the position paper “Managing the transition, strengthening growth”, with analyses of the current situation and recommendations for action in five policy areas. The paper is available for download at Papers and Proceedings on Economics | KfW