KfW ifo Business Climate Index Sees Minor Improvement, Driven by Service Sector Optimism

KfW ifo Business Climate Index Sees Minor Improvement, Driven by Service Sector Optimism

(IN BRIEF) In January 2025, Germany’s small and medium-sized enterprises (SMEs) saw a slight improvement in business sentiment, with the KfW ifo Business Climate Index rising by 0.6 points to -21.4 balance points. Despite this increase, sentiment remains well below long-term averages. The six-month expectations component of the index saw only a minimal rise, reflecting continued pessimism amid political uncertainties and potential trade tensions with the US. While service providers reported a more positive outlook, large enterprises, particularly export-oriented industrial firms, continued to experience declining sentiment. Dr. Klaus Borger of KfW Research emphasized that the improvement in sentiment is modest and primarily driven by service providers, with a significant recovery requiring balanced monetary policies and coordinated responses to transformative challenges.

(PRESS RELEASE) FRANKFURT, 10-Feb-2025 — /EuropaWire/ — Germany’s small and medium-sized enterprises (SMEs) saw a slight uptick in business sentiment at the start of 2025, with the KfW ifo Business Climate Index rising by 0.6 points in January. However, the overall sentiment remains far below long-term averages, with the index currently standing at -21.4 balance points. Despite this modest improvement, the current reading still indicates that the mood among SMEs is significantly lower than pre-pandemic levels, only improving slightly since the depths of the 2009 financial crisis and the initial COVID-19 outbreak in 2020. This marks the first increase in the index since April 2024, offering a small glimmer of hope.

The latest data from the KfW-ifo SME Barometer, which assesses business sentiment based on company size and sector, also shows that the six-month expectations component of the index only saw a minimal rise of 0.1 points to -23.6. This suggests that while optimism has slightly improved, pessimism still runs deep, fueled by ongoing political uncertainties in Germany and a potential trade conflict with the United States. Meanwhile, assessments of the current situation improved by 1.2 points to -19.3 balance points, indicating that the downward trend may have reached its lowest point.

Notably, service providers were the only sector to report a significant improvement in sentiment in January, with their outlooks turning more positive. Other sectors, however, continued to express more cautious and negative views about the economy.

The situation was less favorable for large enterprises, which saw their business climate index fall by 0.9 points to -28.0 in January. While large enterprises viewed their current situation slightly more positively than in December, their expectations for the future took a sharp downturn. Despite this, service providers stood out as the only sector to show optimism, even among larger businesses.

Dr. Klaus Borger, economic expert at KfW Research, cautioned that the small rise in SME sentiment should not be viewed as a sign of recovery: “This modest improvement is merely a drop in the ocean, especially considering the long-standing stagnation across the broader economy and the loss of international competitiveness,” he stated. “This is particularly true given that the positive shift is almost entirely driven by service providers, while the sentiment among large, export-oriented industrial firms continues to worsen. A significant turnaround would require balanced monetary policies and coordinated efforts from both policymakers and businesses to address the ongoing transformative challenges.”

The full KfW-ifo SME Barometer can be accessed at KfW’s website.

Media Contact:

Ms. Nina Luttmer
+49 69 7431 41336
nina.luttmer@kfw.de

SOURCE: KfW Entwicklungsbank GmbH