KfW-ifo SME Barometer: Muted sentiment, dim outlook

• SME business sentiment drops for the third consecutive month
• Situation assessments continue to fall, expectations near all-time low
• Germany is at the beginning of a technical recession

The mix of exploding energy costs, waning purchasing power, major uncertainties about natural gas supplies and the ongoing war in Ukraine is increasingly spoiling the mood among small and medium-sized enterprises. SME business confidence fell by 1.4 points to -16.4 balance points in August. That was the third consecutive drop, which signals a sentiment trend reversal, according to the rule of thumb. Both sentiment components are down. Business situation assessments dropped by 0.9 points to now 6.8 balance points. Expectations are more pessimistic than almost ever before. After falling by 1.9 points to -36.2 balance points, they are now at their second lowest level since the beginning of the time series in January 2005.

SME business confidence in August was below the long-term average in almost all main economic sectors. However, there were differences in the level of business sentiment and its variation on the preceding month. The least affected sector was construction and civil engineering (+1.6 points to -8.7 balance points), the only one to actually recover again slightly after the pronounced drop in July. It was followed by the services sector, where the sentiment trend is now heading downward again (-2.2 points to -11.7 balance points) after the end of the catch-up process that followed the elimination of the vast majority of pandemic restrictions. Confidence in the manufacturing sector is on an ever steeper downward slide (-2.5 points to -20.9 balance points). However, at some distance, both segments of commerce reported the worst sentiment. Sentiment among wholesalers slipped by -5.6 points to -26.3 balance points, while the mood in retail was downright depressed, this time falling by -2.8 points to -31.3 balance points. The general uncertainty and the enormous losses of purchasing power resulting from steep price increases, particularly for energy and food, are leaving deep traces.

“The mood is bad, the outlook is dim”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The only times when SMEs’ expectations were this pessimistic was before what were by far the deepest recessions in Germany’s history – before the beginning of the global financial crisis in the winter of 2008/2009 and after the outbreak of the coronavirus pandemic in the first half of 2020. However, the way the index is constructed means that we need to put the depressing business expectations into perspective. They measure how widespread the fear of an economic crash is. In other words, they reflect the wide variety of fears and concerns around the war and the energy crisis across the breadth of the corporate landscape. But they are not a reliable measure of the depth of the feared downturn itself. We currently assume that Germany is at the beginning of a technical recession that will end up being much milder than the downturns during the financial crisis or the coronavirus crisis”, concluded Köhler-Geib.

The current KfW-ifo SME Barometer can be downloaded from:
KfW-ifo SME Barometer