KfW Research: The green shoots of optimism continue to grow

• SME business sentiment has improved for the fourth month in a row
• Strong rise in expectations, minor drop in situation assessments
• Businesses anticipate more employment and lower inflation
• Fear of steep economic downturn is increasingly dwindling

The mood among small and medium-sized enterprises improved yet again as they entered the new year. Their business sentiment rose for the fourth consecutive month in January, this time by 3.3 points on December to now -11.0 balance points. It is already up by 12.6 points on the low of last September. Under the acute impression of the approaching energy crisis, the expectations component of business sentiment at the time had dropped to the deepest recession level. In January expectations took another strong leap of 6.2 points to now -20.7 balance points. Situation assessments, on the other hand, dropped by a marginal 0.1 points to -0.5 balance points and thus remain only slightly below the historic average.

In January the sentiment trend pointed upwards in nearly all main economic sectors. The SME construction sector was the only one to experience a drop in confidence, which fell by 0.7 points to -17.3 balance points. This is likely due to the current problems in residential construction and its special importance for small and medium-sized construction firms. Residential construction has already been suffering from expensive and scarce building materials, skills shortages and rising interest rates for some time now.

Businesses’ specific expectations around inflation and the labour market showed a pleasing trend: Sales price expectations continued to drop significantly (-5.1 points to 21.2 balance points), and employment expectations rose noticeably (+5.1 points to 6.4 balance points). For many months now, the employment indicator has remained almost consistently on a level above the historic average, underscoring the robust condition of the labour market despite the difficult economic situation.

“The fears of a steep economic downturn are dwindling more and more. For me, that is the most important message of the KfW-ifo SME Barometer in January”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The risk of a gas shortage has been averted at least for this winter, and the energy price brakes are dampening the decline in household consumption expected for 2023 as a result of sharply higher living costs. By contrast, the slack global economy is casting a shadow on the export outlook, and the war in Ukraine continues to create enormous uncertainties which make investment decisions harder for businesses. Besides, the natural gas supply situation in the coming winter still remains difficult to predict. All in all, a minor contraction in economic output remains likely. The downside and upside forecasting risks are considerable, however, and they now include the possibility that the recession long regarded as virtually certain will not come at all over the whole of 2023”, concluded Köhler-Geib.

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