KfW-ifo SME Barometer: Positive business situation, but new concerns about the pandemic

• Business sentiment among SMEs falls in July
• Clearly less optimism, but a slight improvement in the business situation
• Concerns about the pandemic dampen sentiment among service providers most of all
• Virus mutations remain a risk, but across-the-board shutdowns unlikely

Time was when business sentiment among SMEs knew only one direction – up. This has now suffered a setback and is on the wane for the first time since January. The reasons for the drop of 2.6 points (to a balance of 9.5 points) are primarily concerns about the rapid spread of the Delta variant and the surge in the rate of new infections. Business sentiment among small and medium-sized enterprises is declining solely due to expectations, whereas the assessment of the business situation is showing a moderate improvement.

The situation assessment has risen for the sixth time in a row. The change of +0.6 points is markedly smaller than in the previous two months, but the situation assessment itself, at 11.2 points, is well above the long-term average. Nevertheless, it is a long way short of the past record values. At the same time, SMEs have scaled back their business expectations for the next six-month period by a considerable 5.6 points. With a balance of 7.6 points, optimism still has the upper hand, but the euphoria from the previous month has evaporated.

Among large companies too, waning optimism (-4.6 points) has caused business sentiment to fall slightly by -1.2 points, while the situation assessment has shown an improvement (+2.6 points). At a level of 11.7 points, business sentiment is nevertheless clearly above average.

The reason for the recent downturn in business confidence among SMEs is to be found above all among service companies. Here, the fall in business expectations has been particularly steep (-7.8 points). As this large segment covers many business sectors that have been especially hard hit by the containment measures in the past, for example the hospitality sector and the travel industry, concerns about the renewed and rapid increases in new infections in Germany and many other European countries are likely to be the major cause of weakening business confidence. Retail firms in the SME segment are evidently more relaxed about this. They are looking to the future with greater optimism and once more reporting improvements in their already positive business situation.

Apart from the pandemic, the shortage of materials is currently the other major problem hampering economic growth in Germany. This is affecting the manufacturing and construction industries most of all. The SMEs in these areas nevertheless reported renewed improvement in their business situation in July, and business sentiment also showed a moderate rise. On the other hand, business expectations, which are weakening in the manufacturing sector in particular, are sending out a negative signal.

Dr Fritzi Köhler-Geib, KfW’s Chief Economist, sums up: “The business situation among SMEs is good, but in terms of business expectations optimism is declining. The newly increasing incidence rates in particular are causing concern among service providers, as it is still not clear how policymakers are going to react. If we keep up our efforts in the areas of vaccinations, tests and face coverings, it should be possible to avoid across-the-board closures among businesses, hotels and restaurants. The rate at which businesses continue to open up is likely to slow. Materials bottlenecks have been plaguing the manufacturing sector since the beginning of the year, and industrial production has tended to fall. Overflowing order books are evidently more important for the situation assessment. Nevertheless, the businesses that have already opened in the services sector combined with consumer catch-up purchases are probably sufficient to ensure solid growth in the current quarter. How things pan out in autumn depends especially on the progress made on the vaccination front in the coming months. As regards the economy and society as a whole, I can only say: ‘Vaccinate, vaccinate, vaccinate!’”

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