OREANDA-NEWS. The German economy is continuing on its road to recovery. The business climate among small and medium-sized enterprises, which is the most important indicator in the KfW ifo SME Barometer, improved by 0.8 points in October to 15.1 balance points - which at the end of the day is still a seven-month high and more than enough to correct the slight fall seen in the previous month.

Both sentiment components are positive. Business expectations for the next six-month period were up 1.3 points to 9.4 balance points, accounting for the lion's share of the increase. The disproportionately strong growth in business expectations is a good sign, since decisions regarding investment and employment depend on confidence in the future. By contrast, assessments of the current business situation only improved slightly by 0.3 points to 20.5 balance points, although this means that they remain at a historically high level which indicates a good economic situation at present.

Unlike the small and medium-sized businesses, major corporations were rather less optimistic in October than they had been in September. At the same time this is not a major cause for concern. Although the expectation indicator did decrease by 1.5 points to 7.5 balance points, this only corrects half of the substantial growth from the previous month. The upward trajectory therefore remains intact. Large corporations' assessments of the current situation, by contrast, improved by 1.5 points to 16.6 balance points, so that the business climate actually remained unchanged on the whole (-0.1 points to 12.2 balance points).

Positive signs in October also came from the personnel departments of companies in both groups. Among SMEs, employment expectations improved by a hefty 1.8 points to 10.6 balance points. This is the highest level in more than one and a half years. For major corporations this also meant an (admittedly smaller) increase of +0.3 points to 11.9 balance points in the final analysis. “Germany is on the road to recovery. Domestic demand, which has been good for some time, is increasingly being bolstered by an improvement in the European and international landscape”, says Dr Jorg Zeuner, Chief Economist of the KfW Group. In 2014, economic output grew faster than the long-term trend for the first time in three years, resulting in a reversal with respect to the underutilisation of production capacity. “We expect real growth of up to 2% in the year ahead, accompanied by a pickup in investment activity. Having said that, we must not allow ourselves to overlook the risks. In the eurozone, not only could continued stabilisation be jeopardised by financing bottlenecks, a further appreciation of the euro would also be untimely for Europe”.