KfW-ifo SME Barometer: The concerns are back

• SME business sentiment deteriorates due to falling expectations
• Confidence is on a downward spiral in large enterprises as well
• Economic growth in 2021 is set to be slightly lower than expected

After the lockdown measures were lifted, the Delta variant has now unleashed a fourth coronavirus wave in Germany. At the same time, the shortages of materials and supplies in the manufacturing sector are proving to be more persistent than initially assumed. The KfW-ifo SME Barometer shows that both of these factors are fuelling concerns over the future economic recovery. In August, SME business confidence dropped for the second consecutive month, this time by 2.3 points to 6.9 balance points. Once again the decline was driven exclusively by the expectations of small and medium-sized enterprises, which fell sharply just like in the previous month (-6.4 to 0.8 balance points). Situation assessments, on the other hand, continue on an upward trend, rising by 1.9 points to 13.1 balance points, the highest level of the year.

Large enterprises, too, are currently more pessimistic. They not only revised their expectations sharply downward (-7.2 points to -1.1 balance points) but slightly downgraded their business situation assessments as well (-1.2 points to 16.0 balance points). Overall, their business sentiment has fallen by 4.4 points to 7.2 balance points.

A look at the economic sectors and enterprise size classes reveals that only the construction industry stood out positively in August. Sentiment improved in small and medium-sized as well as large construction firms (+1.3 points to 13.5 balance points and +4.7 points to 9.5 balance points) – evidence that business remains fundamentally good in this sector. Business confidence fell more or less significantly in almost all other segments. Large-scale industry experienced a particularly sharp drop (-9.6 points to 16.4 balance points). This went hand-in-hand with an equally abrupt decline in export expectations (-10.4 points to 4.6 balance points). It appears that the global shortages of industrial inputs such as electronic components continue to be so severe that industrial output for the time being can no longer keep pace with the very strong order volume, which now significantly exceeds the pre-coronavirus crisis level. Sentiment is dropping among small and medium-sized service providers as well – moderately but nevertheless palpably (-3.1 points to 2.0 balance points). The bulk of contact-intensive activities in the arts, entertainment, accommodation and personal services are conducted by SME service providers, which is why these are increasingly concerned about the emerging fourth coronavirus wave.

“It’s summer, but rain clouds keep blocking out the sun – that also describes the mood in the German economy”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Clouds dominated the business cycle again in August, and business confidence fell for a second time. The deterioration in confidence driven by lower expectations fits the picture, as there is limited further upside potential for economic growth. The material shortages in the industrial sector are likely to ease only gradually in the months ahead, and until they do they will weigh on production despite high demand. To be sure, after the lockdowns private households now have unusually high amounts of money in their wallets to buy more of the services they have long missed, such as hospitality. But with the Delta variant and the fourth coronavirus wave rolling towards us, pandemic concerns are rising again. We have therefore slightly downgraded our GDP forecast for 2021 to 3.0%.”

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