KfW-ifo SME Barometer: SMEs are more upbeat going into Lent

• Business sentiment continues to improve
• Expectations and situation assessments better than in the previous month
• Sales price expectations have dropped again sharply
• Economic output will almost stagnate in 2023

The KfW-ifo SME Barometer for February shows business sentiment continuing to improve going into Lent. SME business confidence rose by 2.8 points on January to -8.3 balance points. Unlike in the previous month, both business sentiment components contributed to the rise this time. Business expectations for the next six months are once again much less pessimistic, improving by 3.8 points to -17.0 balance points. But they remain on a very low level, revealing that businesses are still quite sceptical about the future. Situation assessments, on the other hand, now gained 1.4 points to reach 0.9 balance points, still hovering around the long-term average.

The sentiment trend pointed upward in all main economic sectors without exception. SME retailers experienced the strongest increase, with sentiment improving by 9.8 points to -0.6 balance points. Retailers thus topped the list, which suggests that concerns over losses in purchasing power among households are easing. Construction, however, reported the smallest improvement and lowest business sentiment level among SMEs, edging upward by 1.7 points to -15.8 balance points. More than anything, this most likely reflects the current problems in the interest rate-sensitive area of residential construction.

The mood also improved among large enterprises in February. Rising 3.8 points, the increase was stronger than among SMEs, but their sentiment level remains lower at -12.4 balance points. The main drivers were business expectations, which improved by a very strong 6.8 points to -16.4 balance points and are now virtually on a par with SMEs. Business situation assessments, however, increased only minimally by 0.1 points and, at now -8.5 balance points, are still well below the long-term average, unlike in the SME sector.

The sales price expectations of enterprises of both size classes give hope that the continuing high inflation will start to ease soon. They continued to nosedive in February, falling steeply yet again (SMEs: -6.9 points to 14.0 balance points; large enterprises: -8.6 points to 15.0 balance points).

“The period of Lent has now begun, but the months ahead will not be nearly as lean as businesses had long feared”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. Last autumn there was enormous fear of a broad economic downturn in light of the imminent energy crisis. The threat of a gas shortage has now been averted at least for the current heating period, and the energy price caps are easing the financial pressure on households. Nonetheless, stiff economic headwinds are still blowing because the slack global economy is dimming the outlook for exports, the monetary policy measures are likely to fully unfold their restrictive effect only this year, and real wage losses are reverberating. “On balance, I expect a moderate technical recession for Germany in the current winter half-year and a slight 0.3% contraction of GDP for the year 2023 as a whole. If we consider that 2023 has two fewer working days than 2022 and this fluctuation in the number of working days alone will take away 0.2 percentage points of growth, our economic forecast materially reflects a stagnation in the current year”, added Köhler-Geib.

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