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Press Release from 2021-10-04 / Group

KfW-ifo SME Barometer: Manufacturing sector is dragging down SME sentiment

  • Third consecutive downturn
  • Situation assessments worse for first time since January, expectations trending downward
  • Economic growth is flattening but remains positive

Business sentiment among small and medium-sized enterprises in Germany has embarked on a downward trend, dropping for the third straight month. It is now only slight above average, after dropping 1.7 points to 5.3 balance points. The KfW-ifo SME Barometer shows that both components of the indicator have fallen. Business expectations fell by 2.0 points to -0.9 balance points and are now slightly below the zero line, which stands for the long-term average. For the first time since January, situation assessments have also dropped, down by 1.4 points to 11.9 balance points.

Business confidence among large enterprises dropped at a similar rate as in SMEs in September

(-1.6 points to 5.9 balance points). Here, however, more negative situation assessments are the sole cause (-3.6 to 12.5 balance points). Business expectations remained steady at -0.6 balance points.

The manufacturing sector in particular is dragging economic sentiment down. Production cannot keep pace and is weighing on business confidence despite consistently high export expectations and high demand for German industrial products. The numerous shortages of materials, inputs and transport capacity continue to be the main obstacle. This is particularly the case among manufactur-ing SMEs, whose business confidence in September plunged by 7.8 points to now just 7.0 balance points. Their situation assessments dropped sharply after reaching very high levels in the preceding months. But most of all, expectations are deteriorating rapidly and were even slightly below average in September.

Other sectors are faring much better than manufacturing, particularly construction. Although record-high supply shortages have prevailed here, too, since the beginning of the year, business sentiment has steadily improved among small and medium-sized construction and civil engineering firms, jumping noticeably by +4.0 points to 17.7 balance points in September. There are also bright spots in the segment of SME service businesses, where confidence rose 1.2 points to 3.2 balance points. In SME retail firms, on the other hand, business sentiment is currently stagnating at a solid 8.2 balance points. In the SME wholesale sector, which is even more closely integrated with manufacturing, supply chain problems are also likely to be the cause of the drop in confidence (-1.1 points to 9.3 balance points).

“The last yards are the most difficult. The KfW-ifo SME Barometer shows that the same goes for the pathway of Germany’s small and medium-sized enterprises out of the coronavirus crisis”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Shortages of materials, inputs and freight capacity, in particular, have already slowed production for the past months and could also increasingly weigh on trade. Given the multitude of disruptive forces, however, it is difficult to predict when the supply situation will improve. Service businesses are mainly keeping a close eye on infection rates, which were falling during the survey period. Even if infection rates will presumably rise in the autumn, the use of vaccination certificates, tests and face coverings makes broader shutdowns unlikely. All in all, aggregate economic growth is likely to flatten in the coming months but remain positive. In addition, pent-up demand in the manufacturing sector also provides potential for a growth surge when the current supply chain bottlenecks gradually ease. But that will probably not be the case until sometime next year”, added Köhler-Geib.