So says Peter Kainradl, managing director Austria & Germany at the firm, who points to key factors showing that business confidence is at its highest since 2011, with the DAX index of the 30 largest German companies having closed above the enormously important 10,000 level for the first time in June, and the MDAX index of the next 50 companies has been performing even better. And this has been aided by real action from the European Central Bank (ECB) that included proposals for a €400bn scheme to stimulate credit in the eurozone and a reduction in its lending rate to counter the threat of low inflation.

In response, Mr Kainradl said: ‘This is encouraging news indeed for the acknowledged powerhouse economy of Europe, which has suffered two years or more of virtual stagnation – held back by pressures from the seemingly never-ending sovereign debt crisis and the effect of austerity measures on many of its eurozone neighbours. These have constrained Germany, which has been of necessity the underwriter of all things euro-related, along with slowing demand from emerging markets and, more recently, concerns over relations with Russia due to the crisis in Ukraine.’

However, he commented that SME confidence is key, saying: ‘The backbone of the German economy has always been the strength of its myriad small and medium-sized enterprises (SMEs) – the Mittelstand – which have led the way in innovation and expertise in manufacturing and exports, as well as maintaining relatively high levels of employment. In particular, the export of high added-value products has been the main driver of growth in recent years.’

Although the Mittelstand has not been immune either to the adverse effects of the cooling of markets in Europe and also over the last two years in some of its target export economies, there have recently been signs that a recovery in equipment investment has begun, leading to hopes that the investment backlog that had built up has begun to ebb as the debt crisis eases.

Mr Kainradl said: ‘The return of confidence is vital: research by GE Capital, published in its Capex Barometer for the first quarter of 2014, showed that German SMEs are a good deal more confident than their counterparts in other European markets, and they intend to invest significantly more.

‘Such improvements in confidence, coupled with interest rates that are predicted to remain low for some time to come, should lead to an increase in investment. There is a pent-up need to replace equipment and this should give a much-needed boost to the asset finance and leasing industry.’

The signs augur well for a revival of leasing, which has been slack for the last couple of years, and remains some way below pre-financial crisis levels.

‘Given the recent stagnation of the German economy, it is not surprising that its leasing industry has lagged behind the recent surge in growth seen in countries with similarly mature markets, such as the US and the UK,’ said Mr Kainradl.

‘Current data from the national leasing association, the BDL, show new business volumes have been static since 2011, but the first quarter of 2014 showed a return to growth. Much of this was admittedly due to growth in the auto sector rather than plant and machinery (P&M), but, as already stated, there is pent-up demand to replace equipment and increasing confidence in investing – all of which bode well for leasing, which has for long been viewed as an integral part of the funding mix, especially amongst SMEs.

‘One area of concern for the banking operations of auto lessors is EU regulation, where there is uncertainty regarding securitization, liquidity and capital adequacy requirements. Germany’s many and sizable trade and financial links with eastern European economies mean any escalation of sanctions against Russia over Ukraine, and the possible reaction, could be harmful to German funders.

‘Nonetheless, and despite the challenges, there is much for the industry to look forward to. It is, after all, one of the largest and most developed in the world, and is highly competitive. Although forecasts are for the revival to be gradual, with much in the near term resting on the auto sector, predictions are encouraging for P&M and also the IT, healthcare and renewable energy sectors, and prospects look favourable for captive lessors. Foreign investment, particularly into the Mittelstand from new financial power bases such as China, could bring benefits in terms not only of fresh capital but also a possible solution to the problem of succession in family-run businesses where the tradition of children taking over is under threat.

‘Times are changing, and the leasing industry must change with them. The leasing market needs to keep in tune with the changing demands of its customers and to excel, like them, in innovation and adaptability.’

These and many other issues are covered in the White Clarke Group Germany Asset and Auto Finance Country Survey, which provides in-depth background, comment and analysis. It is free to download here.