Sentiment among German SMEs picks up

• SMEs' expectations and situation assessments improve noticeably
• SME business confidence reaches annual high
• Large enterprises remain sceptical

Germany’s small and medium-sized enterprises are not letting economic risks such as the upcoming Brexit referendum spoil their mood, as shown by the current KfW-ifo SME Barometer. On the contrary, in May the SME business climate improved by a strong 3.0 points to reach 15.4 balance points, the highest level this year. Both components of the indicator are up sharply. Assessments of the current business situation improved by 3.4 points to 27.0 balance points and business expectations climbed 2.7 points to 3.9 balance points.

Scepticism continues to dominate large enterprises, however, which are more internationally oriented. The global situation is characterised not only by unresolved issues in Europe, but also by recessions in Russia and Brazil, as well as the economic slowdown in China. Understandably, they remain clearly less confident than small and medium-sized enterprises. Situation assessments alone, which improved by 2.4 points to 18.3 balance points on the previous month, allowed business confidence in the large enterprise sector to at least gain a moderate 1.2 points to reach 7.9 balance points in May. Expectations, however, were practically unchanged and hovered below the long-term average for the fifth consecutive month (+0.1 points to -2.4 balance points).

Across the industries, the international environment is clearly the primary source of concern, whereas domestic demand fuels economic optimism. The business climate indicator of large manufacturers dipped slightly by 0.9 points to 2.5 balance points. Large manufacturers, which are particularly sensitive to global variations in demand, thus remained clearly at the bottom of the table, just as they were in the three preceding months. Large construction firms were also less confident than in the previous month, but this decline is insignificant given the continuing high level of this volatile sub-indicator. Sentiment among small and medium-sized construction firms, on the other hand, climbed to a new all-time high across Germany in May, rising 4.4 points to 27.2 balance points, primarily because of their extremely good assessment of ongoing business. That underscores the currently outstanding economic performance of this sector. But the month of May also led to a rise in confidence in the remaining segments – small and medium-sized manufacturers, retail and wholesale.

“Germany’s recovery remains on track – that is the core message of the May findings of the KfW-ifo SME Barometer”, commented Dr Jörg Zeuner, Chief Economist of KfW Group. After the strong start to the year the second quarter can be expected to soften again before the recovery picks up pace again from the middle of the year. “The external environment should brighten gradually and the reliable impulses coming from domestic demand can be expected to intensify. I expect economic growth of 1.7% this year and 1.8% next year”, Zeuner added. A key event, however, was the UK’s upcoming referendum on continuing EU membership, which was one of the main risks to the economy in the short term. “If Britain votes in favour of a Brexit on 23 June, thereby taking the centrifugal forces in Europe into a new dimension, we will reconsider our economic forecast.”

The latest KfW-ifo SME Barometer can be downloaded from

www.kfw.de/mittelstandsbarometer