KfW-ifo SME Barometer: Confidence among SMEs is in freefall

• Coronavirus crisis pushed business sentiment reading in April to all-time low
• Business situation assessments and expectations broke negative records
• Recovery may be relatively swift

Business sentiment in the German SME sector continues to plummet. In April it nosedived by 26.0 points, down even more sharply than in March, when it plunged by 20.0 points. At now -45.4 balance points, the mood among small and medium-sized enterprises is even more depressed than eleven years ago when the financial crisis was at its peak (March 2009: -37.6 balance points). Both subcomponents of the indicator stand out with new negative records. Business situation assessments dropped by 30.6 points, the sharpest monthly drop ever recorded. The strongest previous decline was 10.9 points and occurred in March. Despite the unprecedented collapse since February, however, situation assessments remain above their financial crisis lows, at -31.5. This suggests that SMEs entered the crisis in a robust position two months ago. Their business expectations have deteriorated rapidly again, although the rate of decline has slowed somewhat (April: -22.0 points to 57.6 balance points, March: -28.0 points). SMEs have never been as pessimistic about the future as they are right now.

Large enterprises were even more downbeat than SMEs in April. After another extremely sharp drop of 23.2 points, their business climate fell to the new all-time low of -54.5 balance points. Both their situation assessments (-30.4 points to -49.1 balance points) and their business expectations (-17.1 points to -59.4 balance points) dropped very steeply again.

The measures introduced to contain the coronavirus pandemic in the second half of March, such as physical distancing rules and extensive mandatory business closures, affected all industries in April, if to varying degrees. The slump in the business climate on the previous month ranged from -30.8 points in the SME retail sector to -17.7 points among large service providers. Confidence levels there had already virtually collapsed in March. At -60.5 balance points, sentiment is currently the lowest among large manufacturers, especially in the automotive industry and among makers of high-quality capital goods. Export expectations in this sector are also gloomier than ever before, both among large enterprises (-28.0 points to -60.7 balance points) and SMEs (-32.2 points to -57.9 balance points). SME construction firms, on the other hand, reported the lowest drop in sentiment (-8.8 balance points).

“Without a doubt, the findings of the KfW-ifo SME Barometer for April are depressing. On average, all individual indicators surveyed have fallen by around ten times the typical monthly variation”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “This shows us impressively the far-reaching economic impact of the mandatory shutdown of broad areas of life which was necessary to protect public health. As the historic slump in the business climate is due to the very special circumstances of the coronavirus pandemic and not driven by any genuinely economic factors, sentiment should be able to rebound relatively swiftly once we can ease our foot off the brakes. All confidence-building measures that serve equally to protect human life and livelihoods will be crucial, such as rapid testing, reliable contact tracing and hygiene strategies. After all, people will not fully participate in economic and public life again until the risk of contagion is as low as possible and predictable. I am confident that we saw sentiment bottom out in April thanks to the comprehensive coronavirus containment strategy, the successes achieved since March in stopping the spread of infections, and the now announced or already implemented easing of restrictions. We can expect economic growth to start to rebound in the second half of 2020.”

The current KfW-ifo SME Barometer can be downloaded from: www.kfw.de/mittelstandsbarometer.