KfW-ifo SME Barometer: Sentiment brightens at the end of the year

• SME business confidence rises sharply in lead-up to Christmas
• Expectations rise for third consecutive month, situation assessments improve for first time since June
• Year ends on conciliatory note and with hope for a milder recession next year

SME business confidence increased for the third time in the lead-up to Christmas, rising by a strong 4.9 points to -14.5 balance points. Expectations, which had been improving since October, rose by another +7.3 points to -27.1 balance points, according to the KfW-ifo SME Barometer for December. Nevertheless, businesses are still far from optimistic, as expectations remain on a level that has only been this low in the coronavirus and financial crises. Assessments of the current business situation, however, also improved now for the first time since June, rising by 2.0 points to now -0.5 balance points in December. But given their steep drop at the beginning of autumn, they nonetheless fell by 6.8 points on average for the quarter, which points to a drop in economic output in the fourth quarter.

Small and medium-sized enterprises from nearly all sectors reported an improvement in December. Business sentiment increased most markedly among retailers (+6.7 points to -21.0 balance points), whose expectations for the next six months have brightened somewhat and situation assessments indicate that Christmas business is not going quite so badly, rising by +16.3 points to -7.3 balance points. Manufacturers also reported noticeably brighter sentiment, which was up by 6.4 points. Only the construction and civil engineering sector reported a continuing decline in sentiment.

Confidence is improving not just among SMEs but also among large enterprises in the lead-up to Christmas. Their business confidence rose by 5.6 points to -18.2 balance points, with construction also reporting a minor sentiment improvement more broadly across the sector than SMEs.

“Businesses are increasingly ditching the temporary doom and gloom attitude”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Well-filled gas storage tanks and relief for businesses and households provided by the energy price brake are likely to play an important role in this.” As a result, there are definitely upside risks to the economic forecast of KfW Research, which sees a 1% contraction in Germany’s economic output next year. “But despite the noticeable improvement in business sentiment since October, a clear majority of SMEs and large enterprises still expect their business situation to deteriorate in the next six months, and the forecast uncertainty also surveyed by the Ifo Institute remains extraordinarily high as well. Both could cause businesses to hold off on investments and accelerate the downturn. Besides, filling the gas storage tanks will likely become more difficult next year with cuts in Russian gas supplies and possibly higher demand for LNG from China than in 2022, which will limit the potential for a recovery in the energy-intensive industrial sectors. Ultimately, however, the good Christmas news remains that the deep recession long suggested by the sentiment indicators will most probably not occur”, concluded Köhler-Geib.

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