KfW Research: Iran war is weighing on SME sentiment

• Business Climate Index has dropped in all economic sectors
• Decline is mainly due to uncertain business outlook
• Sentiment among large enterprises has fallen even more than among SMEs

Up until the end of February, many indicators pointed to an economic upswing in Germany. But the war in Iran has now thrown almost everything into doubt. The business sentiment of small and medium-sized enterprises fell by 3.6 points to -18.2 points in March. That means sentiment is well below the zero line, which represents the long-term average.

The negative trend captured by the KfW-ifo SME Barometer was mainly driven by six-month business expectations, which dipped by 7.6 points to now -19.2 points. Business situation assessments, on the other hand, were even moderately better than in February. KfW evaluates results of the ifo economic survey for the Business Climate Index by company size classes and main economic sectors.

“Businesses are experiencing a high level of uncertainty. That will not change for as long as the war in Iran continues. It will delay the upswing in Germany, which will not be as strong as we had hoped,”

said Dr Dirk Schumacher, Chief Economist of KfW.

Business confidence declined across SMEs of all sectors in March. Manufacturing saw the steepest drop in sentiment. Only the main construction industry remained relatively robust, posting a minimal decline.

Large enterprises even experienced a slightly steeper drop in sentiment than SMEs: -4.7 points to -21.1 points. Here, too, all sectors were affected.

The data also shows that the increase in oil and gas prices as a result of the Middle East conflict is leading many businesses to expect much higher (sales) prices in the future. This is the case among both SMEs and large enterprises. The rate of increase is similar to that experienced during the COVID-19 pandemic of 2020/21. However, international supply chains remain largely intact and the conflict regionally confined, unlike five years ago. In the worst case, however, a self-fulfilling prophecy may occur should demand for what are perceived as scarce goods surge and drive prices higher.

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

^{KfW supports SMEs with a number of promotional programmes on behalf of the Federal Government. More information is available at We are strengthening the SME sector (German page).}