KfW-ifo SME Barometer: Omicron is clouding sentiment and economic outlook for 2022

• SME business sentiment continues to fall rapidly
• Expectations and situation assessments are down sharply
• Business sentiment among large enterprises has also deteriorated sharply

The new Omicron variant is drawing new worry lines on the faces of SME entrepreneurs. SME business sentiment fell by 4.0 points in December, continuing the downward trend that began in July and paused only in October, as illustrated by the current KfW-ifo SME Barometer. For the first time since April, sentiment has fallen below the zero line to now -3.1 balance points, which is lower than the historic average. Both of the business sentiment components surveyed have dropped noticeably: The assessments of the current business situation are now at just 5.5 balance points, down 3.6 points. Expectations for the next six months even worsened by 4.5 points. They are now again deep in pessimistic territory at -11.3 balance points – a déjà vu of the previous year.

Large enterprises, too, were drawn into the downward spiral again in December, after their sentiment stabilised temporarily in November. Their business confidence dropped at practically the same rate as that of SMEs, falling by -3.8 points to 0.8 balance points. However, it was their business situation assessments, which fell by -4.9 points to 6.1 balance points, that contributed slightly more to the deterioration than their expectations (-2.9 points to -4.3 balance points).

A look at individual sectors reveals that sentiment darkened abruptly among both service businesses and retailers in December. Both large and small and medium-sized enterprises reported declines in business sentiment of up to three times a typical monthly variation. This icy sentiment comes as little surprise. The Delta wave, which was just beginning to flatten out on a high level, already made it necessary to restrict certain venues to vaccinated or recovered persons and caused some patrons to stay away from contact-intensive venues such as restaurants, leisure, entertainment and recreational facilities as well as stationary retail outlets for fear of infection. The expected surge in the wave caused by the new Omicron variant is threatening to make further contact restrictions necessary at the start of 2022 to prevent the healthcare system from becoming overwhelmed.

“Dark clouds are gathering on the economic horizon this winter and darkening the outlook for 2022. That is the anxious message with which the KfW-ifo SME Barometer is ending the second year of the coronavirus pandemic”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The Omicron variant is threatening to derail the economy yet again. What is likely is that Germany’s economic output will shrink at the beginning of 2022 because the industrial sector cannot act as a sufficient counterweight to the affected services sector for now due to persistent material bottlenecks. But with likely vaccine mandates, warmer weather and modified vaccines coming, there is reason to hope that the situation among service providers will ease in the second quarter. However, new global supply chain disruptions will also become more likely if Omicron leads to closures of production facilities or logistics hubs at major trading partners and the turnaround in the manufacturing sector is delayed. China, which will probably stick to its strict zero-COVID policy, is particularly critical in this regard. Overall, the economic dip in the winter half-year will probably be deeper than was expected just a few weeks ago, and the subsequent recovery will move at a slower pace at first”, added Köhler-Geib.

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