KfW-ifo SME Barometer: SME business confidence improved further at the start of spring

• Business sentiment is rising at a much faster pace
• Situation assessments have improved, expectations are highest since the outbreak of the war
• Economy looks set to recover in the course of the year

The current KfW-ifo SME Barometer shows that SME business confidence continued to improve at the start of spring. Sentiment rose to -3.2 balance points in March, up 4.9 points on February. Both sentiment components improved significantly. Expectations shot up by 6.7 points to now -10.0 balance points, the highest level since the outbreak of the war in Ukraine. This indicator, however, remains in clearly negative territory, highlighting the fact that most enterprises remain quite sceptical about what the future holds. Situation assessments rose by 2.9 points in March to now 3.9 balance points.

The mood brightened again in all main economic sectors without exception. This time, services industries experienced the strongest increase, with sentiment rising by 7.6 points to a slightly positive 1.7 balance points. SME retailers retained the top rank on the sentiment leaderboard, with a rise of 3.5 points to 3.2 balance points. Tangible improvements in business sentiment were also reported by SME wholesalers (+2.6 points to -6.8 balance points) and construction firms (+2.4 points to -12.5 balance points). Nevertheless, construction companies continue to occupy the bottom rank among SMEs by a wide margin. The focus of their activities lies on residential construction, which is suffering particularly from the rapid rise in interest rates and high costs of materials.

Overall sentiment among large enterprises was also higher in March, but there were some differences to SMEs. While business expectations were almost comparable (+4.8 points to -11.5 balance points), most large enterprises remained dissatisfied with their current business situation and gave it a clearly negative assessment (+3.3 points to -5.0 balance points). Overall business sentiment among large enterprises rose by 4.2 points to -8.2 balance points.

“The gravest economic worries have eased, and confidence is returning cautiously”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “But this should not obscure the fact that the economy still faces stiff headwinds. Thus, the full downward effect of monetary policy measures on inflation in particular is likely to be felt only from this year, and the impact of real wage losses also continues to reverberate. Nonetheless, on balance we expect that after contracting at the end of last year, the German economy will begin to recover in the course of 2023, albeit most likely at a rather modest pace.”

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

www.kfw.de/mittelstandsbarometer