KfW-ifo SME Barometer: A sigh of relief

• SME business confidence rebounds after previous month’s all-time low
• Situation assessments down slightly, expectations less pessimistic
• Overall sentiment has improved, with retailers leading the charge

The coronavirus pandemic has caused unprecedented sentiment volatility in the German SME sector. In May, SMEs’ business confidence recovered sharply from its unprecedented nosedive the month before. The current improvement of 10.3 points to now -35.0 balance points was the second strongest since the beginning of the time series in January 2005, but it made up for only a good one fifth of the downturns of March and April. The increase is being sustained solely by business expectations. Relief over the gradual easing of restrictions caused a notable rise of 20.7 points, more than seven times the typical monthly variation. Expectations, however, remain clearly in negative territory at -36.7 balance points. Business situation assessments fell moderately by 1.9 points to -33.3 balance points.

The month of May brought visible progress in slowing the spread of the coronavirus, allowing the measures introduced in the second half of March such as contact restrictions and comprehensive mandatory business closures to be relaxed again. This success is owed to the population’s discipline and general acceptance of the restrictions, and this includes affected businesses, not just SMEs. It also gives large enterprises hope that the worst is over. The business expectations of large enterprises also rose by an unprecedented +27.4 points to -31.8 balance points after the previous month’s all-time low. In contrast, large enterprises’ situation assessments continue to be much worse (-4.4 points to -53.4 balance points), showing a noticeably lower business confidence level of -42.3 balance points (+12.1 points on April) than SMEs.

Large-scale industry in particular has long suffered not just from the coronavirus crisis but from weak international demand, simmering trade conflicts and the ongoing uncertainties of Brexit. Large manufacturers thus remain the least confident of all segments (+8.9 points to -51.7 balance points), followed by manufacturing SMEs (+5.9 points to -40.8 balance points). Manufacturers’ export expectations also remain far below the zero line despite strong increases on April. Retail and wholesale trade was the segment with the strongest increase in confidence in May, benefiting from the reopening of physical stores. Confidence clearly rose by double digits in both wholesale trade (SMEs: +18.6 points to -37.9 balance points; large enterprises: +16.1 points to -31.5 balance points) and retail, where the increase was even stronger (SMEs: +21.6 points to -22.2 balance points; large enterprises: +25.9 points to -27.8 balance points) As before, SME construction firms clearly remain on top of the sentiment leaderboard (+5.9 points to -3.2 balance points).

“The findings of the KfW-ifo SME Barometer since March resemble a rollercoaster ride with a steep downward slide followed by a comparatively short climb in May”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Even if the current sentiment improvement was exceptionally strong from a historic perspective, it is not more than a sigh of relief over the most recent slowing of the coronavirus crisis, which now permits businesses to take a less pessimistic view of the near future. Germany is on a good path with its comprehensive coronavirus response, economic stimulus package and successes achieved in containing the spread of infections. But getting out of the coronavirus slump will take a long time. Hygiene requirements, which must remain in place, have to be complied with in order to prevent further outbreaks . New confidence in the future is the key to a successful outcome.”

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