KfW-ifo SME Barometer: Sentiment rebound has stalled

• SME business sentiment fell in May after six consecutive increases
• Expectations drop steeply while situation assessments trend sideways
• Sales price expectations continue trending downward

The rebound in SME business sentiment stalled in May for the first time after six conse¬cutive rises. After almost reaching the historical average marked by the zero line in April, it now fell by 3.3 points to -6.3 balance points, according to the KfW-ifo SME Barometer. The decline was driven by a drop in business expectations, which fell markedly by 6.1 points to -14.0 balance points. Situation assessments remained on a roughly average level, recording a drop of -0.1 points to 2.0 balance points.

The economic sectors exhibited very mixed trends in May, as they did in the previous month. Whereas sentiment in construction and civil engineering trended slightly upward (+0.5 points), as did services (+0.3 points), confidence in retail and wholesale, in parti¬cular, deteriorated noticeably (-9.5 and -10.3 points). Especially in the two large sectors of manufacturing and services, sentiment is now diverging again quite significantly after converging temporarily. In manufacturing, both situation assessments and expectations are slipping into negative territory again. Service providers, on the other hand, reported a better than average business situation which improved again in May, but more pessi¬mistic expectations. This appears to be a continuing sign of the global shift in consump¬tion back to services and away from goods. Besides, manufacturers are likely to be feeling the impact of global monetary tightening more strongly and, to a certain degree, a decline in competitiveness.

Large enterprises reported even worse sentiment than SMEs. After falling by -6.0 points, their business confidence now sits at -16.4 balance points. The expectations of large enterprises in particular dropped sharply in May (-9.5).

Sales price expectations of enterprises of both size classes also dropped in May, con¬tinuing their downward trend unabated. After hitting an all-time high a year ago, they now sit at 4.3 balance points among SMEs and 0.4 balance points among large enterprises – very close to their historic average. Significantly lower employment expectations also indicate decreasing inflationary pressure.

“The rebound in SME business sentiment stalled in May. Businesses’ expectations remain marked by scepticism, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “After the technical recession in the winter half-year, the German economy should still return to a path of modest growth, as significant increases in nominal wages will stabilise private consumption, and production will benefit from the dissolution of supply bottlenecks, at least in the short term. For 2023 as a whole, I expect growth of -0.3%, an only mild contraction of economic output. In any case, the KfW-ifo SME Barometer delivers a positive message with respect to the development of inflation: The share of enterprises planning to increase their prices in the coming months has dropped to the level typically seen since the beginning of the timeseries in the year 2005. The chances are therefore good that inflation in Germany will be close to 2% again in the foreseeable future.

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

www.kfw.de/smebarometer