KfW-ifo SME Barometer: Attack on Ukraine has sent SME business confidence into a tailspin

• Record slump in expectations, but only marginally lower situation assessments
• Large enterprises are even more pessimistic
• Economic outlook is dimming

SME business sentiment in Germany fell abruptly by 14.9 points as a reaction to Russia’s invasion of Ukraine. At -9.4 points it is now on a similar level as during the second COVID-19 wave in the winter of 2020/2021. The drop in sentiment was primarily due to business expectations, which plunged dramatically by 25.9 points to now -23.2 balance points, the sharpest decline recorded since the beginning of the time series in 2005. Assessments of the current business situation, however, worsened only by a moderate 2.3 points to now 5.9 balance points.

The surge in pessimism was especially strong among small and medium-sized manufacturing enterprises, whose business confidence fell from +9.9 to -10.1 balance points within only a month. In particular, the prospects of a strong rise in energy prices over the longer term, the risk of natural gas supply shortfalls and new bottlenecks in important commodities from Russia and Ukraine have massively clouded the business outlook in the manufacturing sector. This has been compounded by more and more lockdowns in China which are likely to disrupt global supply chains again. But SMEs also downgraded their situation assessments slightly as the war has already caused problems in the supply of specific inputs such as wiring harnesses for the automotive industry, and some businesses are losing turnover in Russia and Ukraine. The deterioration in SME business sentiment in March 2022 pervades all sectors, however. Confidence dropped by a pronounced 16 to 17 points in construction, wholesale and retail, and even the services sector recorded what is still a considerable drop of nearly 10 points.

As is usually the case with international shocks, large enterprises are again more heavily affected than small and medium-sized firms. Their business sentiment fell by a notable 23.5 points to -15.5 balance points in March. Here as well, the slump is mostly due to expectations (-34.7 points to -31.0 balance points). Situation assessments, on the other hand, dropped by 9.7 points to 2.6 balance points.

“Putin’s invasion of Ukraine is a taboo violation with dramatic humanitarian and geopolitical consequences as well as considerable risks for Germany, too. The very pronounced deterioration in SME business confidence in March was therefore foreseeable”, said Dr Fritzi Köhler-Geib. “The immediate effect of the war is first and foremost an additional surge in inflation from what is likely to be a longer-term increase in energy and commodity prices which will weigh on both household purchasing power and business activity in particularly energy and commodity-intensive sectors. But since Russia plays a secondary role as an export destination the loss of Russian demand will have less of an impact, while bottlenecks in critical commodities from Russia are potentially more severe but nearly impossible to predict. The economic impact will ultimately depend on the duration of the war and the spiral of escalation in military action and sanctions. In any case, the war and China’s new problems in containing the pandemic have stalled the momentum from the previously expected vigorous recovery.”

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