KfW-ifo SME Barometer: SME business sentiment is plunging

• Business expectations and situation assessments much lower in November than in previous month
• Large enterprises slightly more optimistic
• Economic output set to drop marginally in the current quarter

According to the current KfW-ifo SME Barometer, SME business sentiment in Germany fell sharply in November after improving in the previous month. It fell by 6.0 points to now just 0.6 balance points as a result of supply bottlenecks and rapidly rising infections during the survey period. Situation assessments remained steady over a long period despite some adversities but have now fallen considerably (-4.4 points). Expectations fell even more sharply by -7.3 points. Business sentiment among large companies, on the other hand, improved slightly. Their situation assessments also dipped somewhat, but expectations improved.

Among small and medium-sized enterprises, the sharpest downturn in sentiment was recorded in the services segment, which includes hospitality and the events industry, among others. After an 8.4-point decline, business sentiment here is slightly below average again, at -5.1 balance points. Situation assessments and expectations are both weighing on sentiment. SME retailers experienced a similar downturn, with business sentiment falling by 6 points to -1.3 balance points. Current business situation assessments remain above average despite worsening in November. Some retailers are likely to benefit from excess savings accumulated during the last lockdown, which are bolstering consumption and cushioning the impact of high energy prices. But stationary retailers fear turnover losses in the months ahead owing to high infection rates and restrictions known as “3G” (vaccinated, recovered or tested) or “2G” (vaccinated or recovered). In addition to the pandemic situation, retailers are increasingly being plagued by supply problems. Retailers’ price expectations are also rising as a result of supply bottlenecks, reaching a new all-time high in November.

All through the year, manufacturing has already been disrupted by material shortages that have also increasingly depressed business sentiment since the summer. Business confidence among SME manufacturers fell again very noticeably by 6.1 points in November and is now merely on an average level. Construction and civil engineering is now the only sector where confidence remains good. But here as well, falling expectations led to a moderate decline in business sentiment in November.

“The current KfW-ifo SME Barometer reflects a considerable downturn in business confidence”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Owing to the critical pandemic situation and persistent supply bottlenecks, economic output is set to drop slightly or at best stagnate during the current quarter. Looking ahead, what matters most is how dangerous the newly detected Omicron variant is”, continued Köhler-Geib. “Incidence levels are trending slightly downwards, to be sure, and the measures adopted by the most recent conference between the federal and state governments have hit most service sectors less hard than the broad lockdown last year. Should Omicron indeed be significantly more contagious than Delta and cause more severe illness even among vaccinated persons, a renewed broad shutdown in many services sectors would have to be expected. Global supply problems could also intensify if major trading partners end up closing production facilities or logistics hubs. China, which will continue its strict zero-COVID policy, is particularly critical in this regard.”

The current KfW-ifo SME Barometer can be downloaded from:
www.kfw.de/mittelstandsbarometer (available in German only).