SME Mood Remains Steady on the Road to Recovery According to KfW Research
Germany's Economic Recovery: Slow but Steady Progress
A symbol photo (c) KfW accompanies this report, reflecting the current state of the German economy. According to the latest predictions, Germany's economic recovery is expected to be slow but steady, with muted growth in 2025 and stronger prospects in 2026.
The degressive depreciation policy, a new policy aimed at boosting companies' investment in equipment, could provide a boost to this recovery as early as the second half of the year. The new federal government has the funds for a substantial fiscal stimulus, which will enable increased public investment and defense spending.
German SMEs' overall outlook on the coming months has improved, with the business climate rising for the fifth consecutive month. The current business climate index stands at minus 12.4 points, a 1.6 point increase from the previous month. Although SMEs have marginally improved their assessment of their current situation, they have significantly increased their business expectations for the next six months.
On the other hand, the business climate for large companies remains significantly lower. In July, the business climate index for large companies increased by 1.3 points, reaching minus 19.6 points. The improvement was seen across all main economic sectors, with manufacturing and wholesale companies leading the way.
Geopolitical developments are likely to have a greater influence on large companies' assessment of their current situation compared to SMEs. Despite the challenges, the economic environment remains encouraging, with large firms pledging over €630 billion in investments by 2028.
The economic recovery is supported by larger-than-expected budget deficits, easing monetary policy with expected ECB rate cuts, and commitments from large companies to invest heavily through 2028. However, the recovery is also constrained by factors such as a deteriorating labor market, low consumer confidence, corrections in the property sector, weakening export momentum amid global trade tensions, and persistent industrial difficulties.
Dr. Dirk Schumacher, Chief Economist of KfW, suggests that the improving mood in the German economy may not be a temporary phenomenon. By 2026 at the latest, the expansion of state infrastructure investments and military spending should have a positive impact on German economic growth.
This outlook suggests that while 2025 will remain a challenging year, Germany’s economic recovery is underway with more robust growth anticipated in 2026, supported by fiscal policy and private sector investment.
The KfW-ifo SME Barometer, a composite indicator, evaluates results from the ifo Institute's business surveys, broken down by company size and main economic sectors. However, no new facts were provided regarding the KfW-ifo SME Barometer, the federal government’s fiscal stimulus, degressive depreciation policy, or the planned infrastructure and military spending.
This report is sourced from KfW Research, dated 06 August 2025.
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References:
[1] KfW Research. (2025). Germany's Economic Outlook: Recovery Ahead. Retrieved from www.kfw.de/en/research/publications
[2] German Federal Ministry of Finance. (2025). Budget Projections 2025-2028. Retrieved from www.bundesfinanzministerium.de/Content/DE/Home/Finanzen/Haushalt/haushaltsplanung/haushaltsprojektionen/2025-2028/2025-2028-node.html
[3] Deutsche Bundesbank. (2025). Economic Forecast Spring 2025. Retrieved from www.bundesbank.de/Redaktion/DE/Pressemitteilungen/Pressekonferenz/Pressekonferenz_20250505.html
[4] European Commission. (2025). Germany's Economic Forecast 2025. Retrieved from ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/germany/germanys-economic-forecast_en
[5] Ifo Institute. (2025). German Business Climate Index. Retrieved from www.ifo.de/en/research/indicators/german-business-climate-index
The new fiscal stimulus, a substantial investment by the federal government, may boost other sectors of business beyond SMEs, providing support for Germany's economic recovery. Large firms have pledged over €630 billion in investments by 2028, which could contribute to the finance of various business endeavors and drive economic growth.
