KfW-ifo SME Barometer: SMEs have some hope again

• Expectations are driving up SME business confidence
• Sentiment is brightening across all sectors
• Situation assessments continue trending downward
• Price increase expectations continue to fall

Signs that the mood among SMEs was shifting were already visible in October, and the trend picked up in November. The KfW-ifo SME Barometer shows that SME business sentiment jumped by 3.6 points to -19.7 balance points. The improvement in the gloomy sentiment was solely the result of a noticeable rise in expectations (+6.4 points to -34.8 balance points). Situation assessments deteriorated again in November, if only minimally (-0.2 points to -2.5 balance points).

The pessimism that had spread among small and medium-sized enterprises receded across all sectors, with retailers showing a noteworthy rise in business sentiment of +8.0 points. The mood in the sector had been particularly negative, and the shift is likely to be a strong positive reaction to the relief for consumers provided by the recently adopted energy price brake. While business expectations are clearly brightening in all sectors, situation assessments continue to decline almost everywhere. Construction and civil engineering, where assessments have already been trending downward since February in light of the interest rate turnaround, was the only sector to report moderate improvements to the business situation.

Sentiment among large enterprises, too, improved in November on the previous month. Their business confidence rose 4.2 points to -24.0 balance points. Here as well, the main drivers are significantly less pessimistic business expectations (+8.2 points), while situation assessments fell more steeply than among SMEs (-1.0 points).

With a view to the development of inflation, it is encouraging that sales price expectations continued to fall even though business prospects have brightened significantly among both SMEs (-5.0 points) and large enterprises (-3.3 points). One reason for this could be the energy price brake, which will reduce the need for price increases due to rising energy costs in the future.

“SMEs are holding out some hope again. The KfW-ifo SME Barometer for November suggests that many businesses are pricing out the major risk of a gas shortage this winter and appear to be shaking off their deepest worries, probably in part because of the recent support package. Without any further bad news emerging, the trend reversal in business expectations might be reaffirmed in the months ahead”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Despite the most recent silver lining, however, business expectations remain roughly as pessimistic as they were at the start of the coronavirus or financial crisis, when Germany’s gross domestic product contracted by 3.7% and 5.7%, respectively. This is probably due not just to the enormous risks presented by the war in Europe but to the deep structural challenges many businesses are facing, including energy prices, which are set to remain very high for the long term. While policymakers must respond to this with a rapid expansion of energy supplies, the onus falls primarily on businesses to invest in their own energy efficiency. I am more optimistic about the development of the economy than businesses are signalling with their expectations, and I see Germany’s economic output contracting by ‘just’ 1% in 2023. It might even perform better, for example if enough businesses adhere to their investment plans despite the difficult environment.”

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