The share of businesses in credit negotiations continued to decline in the first quarter of 2021. Large companies’ demand has stagnated at the low level of the previous quarter. Reluctance to invest and uncertainty about the further course of the pandemic and an increased debt burden in parts of the corporate sector, as well as government guarantee programmes and subsidies are likely to curb credit demand. Banks are slightly tightening their lending policies again but only for SMEs. Large companies, especially in the manufacturing sector, are once again finding it much easier to access bank loans.
Towards the end of the year, new lending by German banks to enterprises and self-employed persons fell behind the previous year’s level by a noticeable -4.3%. Thus, unlike in the spring of 2020, the second coronavirus wave failed to trigger a significant increase in credit demand.
The restrictions imposed in autumn put renewed pressure on many businesses, but the second wave of infections has had a less severe macroeconomic impact. Government financial support combined with businesses’ adaptation measures further stabilised the liquidity position in the fourth quarter. Given the enormous uncertainty, investment financing continues to be in low demand.
We also expect a significant year-on-year decline in lending in the first half of the year. This is partly the result of a pronounced base effect created by the pandemic-driven strong lending activity in spring and summer 2020.
Sentiment in the VC market improved significantly at the end of 2020, fully offsetting the coronavirus-induced drastic confidence loss of the start of the year. In the final quarter, the business climate indicator of the early-stage segment rose by 26.7 points to 17.0 balance points. Business situation and expectations assessments improved at similar rates. The three business climate indicators thus appear to be unimpressed by the renewed lockdown and even exceed the previous pre-coronavirus level. Evidently, the experience from the spring was that the startup scene is less widely affected by the coronavirus restrictions than initially feared.
Sentiment in the German private equity market continues to recover at a sluggish pace. At -30.9 balance points, the sentiment indicator of the later-stage segment hardly improved in the fourth quarter of 2020 (+6.1). Thus, it made up for only around half of the downturn from the first quarter because the path of recovery flattened halfway out of the coronavirus slump. The coronavirus crisis thus continues to weigh heavily on sentiment and impacts on assessments of both the current business situation and expectations.
Despite renewed restrictions on business activity, loans did not attract much interest among enterprises in the fourth quarter of 2020, the KfW-ifo Credit Constraint Indicator survey has found.
The share of enterprises that were engaged in loan negotiations with banks plummeted to a new all-time low in both size classes. Due to the high level of uncertainty about the further course of the pandemic, interest in investment financing in particular is likely to be low at present.
At the same time, companies seeking bank financing are encountering increasingly restrictive financial institutions. The KfW-ifo Credit Constraint Indicator for SMEs rose for the sixth consecutive time to now 22.1%.
In the first half of December, Germany’s SMEs were still relatively unimpressed by rising new infections and the prospects of a tougher lockdown. Their business confidence rose 1.4 points to -10.6 balance points. SMEs’ situation assessments improved noticeably, while their expectations were only slightly higher. The positive outlook for an easing of the situation in the medium term through the rollout of effective vaccines is likely to be neutralised by a dimmer view of the coming months. However, the specific closure of child daycare centres, schools and many stationary retail shops, which went into effect on 16 December until at least 10 January, was not yet specifically known when most of the responses were returned.
KfW Research has calculated that new lending to enterprises and self-employed persons lost momentum in the third quarter. Banks extended just 0.3% more corporate loans than in the same period last year. That is in sharp contrast with the strong growth rates in the first half of the year.
The difficult situation of businesses in the coronavirus crisis has weighed heavily on investment activity. Loans to finance capital expenditure are hardly in demand. At the same time, the economic recovery over the summer months and businesses’ adaptations have reduced their need for liquidity. Credit institutions are moderately tightening their lending standards.
The decline in lending momentum can be expected to continue and accelerate. It is therefore all the more important to keep access to credit open for companies that want to invest now in order to be prepared for future challenges and opportunities.
VC market sentiment continued to recover from the spring coronavirus shock. In the third quarter of 2020, the sentiment indicator of the early-stage segment climbed by 4.7 points to -9.5 balance points. VC investors rated both their current business situation and their expectations better than in the previous quarter, although situation assessments improved only very marginally. In the third quarter, the development of the market environment was mixed. In the fundraising climate as a key factor, however, the rebound from the second quarter continued, with assessments even back in the green zone. VC investors’ concerns over fundraising from the coronavirus crisis thus appear to have largely disappeared.
The recovery of business confidence in the German private equity market from the coronavirus shock has stalled. The sentiment indicator of the later-stage segment stagnated at -37.5 balance points in the third quarter of 2020. Both current business situation assessments and business expectations remained nearly unchanged. The German private equity market environment has ceased to improve since the rebound in the second quarter. On the contrary, many sentiment indicators dropped again in the third quarter. Apart from the assessment of the promotional environment and tax framework, which are in the upper green band, most of the remaining indicators are deep in the red.
The coronavirus crisis has left a deep imprint on the SME sector. The KfW SME Panel 2020 shows that they continue to be severely impacted and their expectations for 2020 as a whole are at a historic low. The turnovers of small and medium-sized enterprises (SMEs) are set to drop more steeply than in the financial crisis of 2009. As a result, many enterprises fear further considerable pressure on employment. Equity ratios are also under stress. But SMEs broadly rest on a solid foundation, partly because of their renewed good performance in 2019. Employment, turnovers and investment rose again last year. SMEs were able to increase their profitability and build up their financial buffers once again, so they entered the crisis from a very good position. But the pathway out is likely to be long and hard and the impact will be felt for a long time.
Banks’ reluctance to give loans to small and medium-sized enterprises continues to grow in the coronavirus crisis. But considering the exceptional economic situation, the criteria are still being tightened with moderation.
The KfW ifo Credit Constraint Indicator for SMEs rose slightly in the third quarter. 21.7% of enterprises reported that banks were being restrictive in loan negotiations. As a result, the gap to large enterprises has widened again slightly. In this size class, credit access improved after criteria were significantly tightened in the previous quarter.
SME service providers encounter particularly adverse conditions for accessing loans. More than one in four currently have difficulties in obtaining loans. At the same time, the situation has eased in other sectors of the economy. Credit constraint decreased across both size classes in the construction and manufacturing sectors.
Number of start-ups in Germany was steady at 70,000 in 2019 – impact of the coronavirus crisis is uncertain
The number of innovation- or growth-driven young enterprises in Germany has stabilised. After rising in 2017 and 2018, the number of start-ups stayed at 70,000 in 2019. It is uncertain how the coronavirus crisis will impact the development of start-ups in 2020. More businesses will close their doors and there will be fewer start-ups, probably leading to more internet-based and digital business models. One fifth of start-up founders plan to employ venture capital to finance their future growth. That is twice as many as in the previous year. The appetite for VC is growing.
VC market Germany: Ready for the next development stage
The market for venture capital has been growing in Germany for some years now. Since 2014, annual VC investment has grown from EUR 0.7 billion to EUR 1.9 billion. But the German VC market is falling further behind other countries, as their VC markets have evolved much better in relation to the strength of their economies. In order to catch up with the United Kingdom, the European champion, German start-ups would have to receive roughly twice as much venture capital each year and over one third more to reach the level of France.
Large financing rounds pose a particular challenge for the German VC market. Foreign investors are involved in nine out of ten financing rounds. For the German VC ecosystem, that increases the risk of start-ups that need finance leaving the country.
The profound shock of the corona crisis has thrown many companies into distress. With their continuously strong lending, Germany's banks and savings banks are making an important contribution to overcoming the economic slump.
According to calculations by KfW Research, the growth of new lending to businesses and self-employed persons in Germany hardly slowed during the second quarter and remained on a high level, increasing by 6.0% year-on-year. The fact that long-term loans in particular were granted is good news for the stability of the economic recovery. Businesses have likely focused on ensuring the survival of their operations, while capital expenditure slipped into the background.
We expect economic momentum to slow in the further course of the year. The ongoing economic recovery is easing the pressure on the liquidity situation, while demand for investment loans should remain weak for some time to come.
Economics in Brief
What does the coronavirus crisis mean for Germany’s VC market? How are market participants responding and what are the consequences? In a special survey, 24 VC investors gave their views on specific aspects.
Start-ups are grappling with losses in turnover, which has also increased the risk of failure. At the same time, the crisis is impacting on their financing situation as even deals already committed to have not been closed. The main reason for this appears to be the great uncertainty caused by the coronavirus shock. However, the threat to further deals not materialising because of the coronavirus should have passed by now. Nevertheless, how long investors will now remain focused on their core business will presumably depend on how well businesses and economies get through the crisis.
Businesses are well-equipped for the crisis
In cooperation with 19 trade associations, KfW Group has conducted a business survey on banking behaviour and financing for the 19th time.
The most important results are:
- The financing situation remained good until the outbreak of the coronavirus crisis.
- The proportion of enterprises reporting difficulties in accessing credit was 13.4%.
- As before, however, small businesses are still much more likely to face difficulties in accessing credit.
- The positive development of businesses’ equity ratio and credit rating continued up until the beginning of 2020.
- Bank loans remain an important source of funding for businesses. Internal funding, however, continues to play by far the most important role in business financing.
The German VC market was unsettled by the uncertain consequences of the coronavirus crisis at the end of the first quarter of 2020 but the initial shock has passed for now. Business sentiment clearly recovered from the all-time low. In the second quarter the sentiment indicator of the early-stage sentiment rose by 50.0 to -11.1 balance points, reversing more than half of the coronavirus slump. VC investors’ assessments of both the current business situation and expectations recovered. The various sub-indicators also improved. VC investors are breathing a sigh of relief with respect to fundraising, exit opportunities, new investment and value adjustments, for example.
Confidence has returned to the German private equity market after the massive coronavirus slump. In the second quarter of 2020 the sentiment indicator of the later-stage segment reversed more than half of the first-quarter losses, rising by 45.6 to -40.6 balance points. Later-stage investors are again taking a more positive view of the current business situation and have higher expectations as well. Although sentiment has risen from its low, most indicators remain negative despite the rebound. Private equity investors are still disgruntled by the fundraising climate, exit opportunities and write-down pressure.
Businesses of all size classes are finding it more difficult to access credit in the coronavirus crisis.
The KfW Ifo Credit Constraint Indicator has reached the highest level since the survey methodology was revised in 2017. More than one fifth of SMEs reported that banks were restrictive in loan negotiations in the second quarter of 2020. However, large enterprises also have to surmount growing obstacles when accessing credit.
But in view of the significantly increased loan default risks due to the deep recession, the difficulties in accessing credit are still limited. This contrasts with the global financial crisis of 2009, when more than 40% of the small and medium-sized manufacturing firms surveyed by the ifo Institute perceived banks’ lending policy as restrictive. The situation today is not just due to the greater resilience of the banking sector but also to the comprehensive economic support packages.
Focus on Economics
The dark clouds of the coronavirus crisis are gradually clearing. Nevertheless, most of the small and medium-sized enterprises will feel the impact of the coronavirus crisis for a long time. That was one of the findings of the second representative supplementary survey based on the KfW SME Panel in early June 2020. Most enterprises do not expect to return to full economic activity before the spring of 2021. Around 2.3 million SMEs were affected by losses in turnover in May as well. Companies lost an average of 46% of their normally anticipated turnover. Overall, SMEs lost around EUR 88 billion in May. This is also putting pressure on their liquidity. It is true that the situation appears to have eased for some enterprises, with 25% currently reporting adequate liquidity reserves. But around one in five will run out of liquidity in four weeks at the latest unless the situation improves.
The coronavirus crisis has led to a sharp increase in lending dynamics. According to calculations by KfW Research, new lending to businesses and self-employed persons in Germany grew by 7.3% year-on-year in the first quarter. The growth rate thus nearly doubled on the final quarter of last year.
At the start of the coronavirus outbreak in March, access to short-term loans was a particularly important instrument for closing the abruptly emerging liquidity gaps. Even if the recovery has begun, German companies are still grappling with severe turnover losses in the pandemic. We therefore expect credit growth to continue increasing and reach its peak in the second quarter.
A number of economic policy measures are facilitating access to loans for businesses, making it easier for banks to expand their credit supply even amid rising risk costs. These measures also include the recently adopted economic stimulus programme.
The uncertain consequences of the coronavirus pandemic have unsettled the German VC market. Business confidence has plummeted to an all-time low. In the first quarter of 2020, the business climate indicator of the early-stage segment nosedived by 72.3 points to -61.3 balance points – an unprecedented decline. VC investors’ assessments of both the current business situation and expectations have deteriorated dramatically.
The coronavirus pandemic has hit the private equity market hard. The German private equity market has experienced a massive loss of confidence. In the first quarter of 2020, the sentiment indicator of the later-stage segment plunged by 94.3 points to -86.7 balance points. Never before have later-stage investors been more pessimistic about both their current business situation and their expectations. The indicator for the current business situation dropped to -82.2 balance points, while the indicator for business expectations fell to -91.2 of -100 possible balance points. The fund-raising climate has now fallen from a record-high level in the previous quarter to just above its previous lowest level.
Focus on Economics
As anticipated, the coronavirus crisis has hit the SME sector with force. A current special survey based on the KfW SME Panel shows the magnitude of the impact. In March, more than 2.2 million SMEs suffered losses in turnover as a result of the crisis. On average, they lost slightly more than half the normally anticipated March turnover alone, or around EUR 75 billion. Still, SMEs are very resilient against crises of this nature because they have continuously improved their equity base and built up financial buffers. This is helping them to temporarily absorb losses in the current crisis and reduce pressure on liquidity. If the lockdown drags on, however, SMEs’ losses will increase and half of them will run out of liquidity reserves by the end of May.
Launched in troubled times but at the right moment:
We are pleased to announce the publication of the first edition of the KfW-ifo Credit Constraint Indicator!
Right now, the new quarterly indicator series by KfW Research is a valuable instrument for monitoring and assessing the supply of credit to SMEs and large-scale enterprises during the crisis. Like the KfW-ifo SME Barometer, it is based on data from the ifo economic surveys.
The evaluation of the first quarter of 2020 shows a good starting position. Credit constraint was low across both size classes. Only 17.2% of SMEs reported difficulties in loan negotiations. That means the impact of the coronavirus on the credit market is yet to be seen.
The coronavirus crisis has hit the export-oriented German economy in what was already a difficult situation. Growing tensions in international trade relations and a worsening global economy also affected SMEs, whose international turnover grew by a mere 3.1% in 2018 to EUR 595 billion, down from 5.5% in 2017. The KfW ifo Export Expectations of the German SME sector were persistently negative in 2019, before crashing through the floor in March 2020. The approx. 800,000 internationally active SMEs have been hit particularly hard by the consequences of the coronavirus crisis in Europe, where their most important sales and procurement markets are located. Even though the trade conflict between the EU and the US is being overshadowed by the coronavirus crisis, one in three SMEs are worried about a possible escalation.
Coronavirus and credit: an important building block to limit the economic fallout
The economy is in the stranglehold of the pandemic. Around the world, drastic restrictions to public life are necessary to protect human life and health. The consequences will be severe because they affect the entire German economy.
The credit market plays an important role in this situation because abrupt turnover losses lead to liquidity shortages in a large number of enterprises. That means German financial institutions have to join forces to get the real economy through the epidemic unharmed. The regulator’s move to loosen equity requirements, the measures of the ECB and expanded promotional programmes from KfW combine to form a convincing package that will bolster the credit market.
The German VC business climate has weakened again but remains good. The business climate indicator of the later stage segment fell by 8.0 points to 10.1 balance points in the fourth quarter of 2019. VC investors rated their current business situation significantly poorer than in the previous quarter, while business expectations remained relatively stable. The indicator for the current business situation decreased to 13.2 balance points (-14.3), while the indicator for business expectations stabilised at 7.0 balance points (-1.7)
The business climate in the German private equity market hardly changed on the preceding quarter. In the fourth quarter of 2019, the business climate index for the later stage segment remained unchanged at 6.3 balance points. Later stage investors gave their current business situation and expectations nearly the same rating as before. The indicator for the current business situation was 11.1 balance points (-1.9), while the indicator for business expectations was 1.5 balance points (+1.9). On average for the year 2019, the business climate in the private equity market was on the upper edge of the normal range and thus remained well behind the two very good previous years.
Focus on Economics
Do digitalisation projects have specific characteristics that conflict with external financing? To answer this question, this study compares the financing structure of digitalisation projects with that of investments using a statistical procedure from evaluation research.
The central finding is that the financing structure of both types of projects differs significantly – even when comparing companies that are similar in size, age, credit rating and the respective project scope. This indicates that special characteristics of digitalisation projects are an obstacle to financing with bank loans.
The number of innovation- or growth-driven young enterprises in Germany has increased again. In 2018 there were 70,000 start-ups, after 60,000 in the previous year.
On average, nine in 100 businesses founded by men have start-up characteristics, as opposed to only three in 100 for women. Businesses founded by women and men differ primarily in how strongly they are innovation- and growth-driven. Examples of suitable measures for closing the gender gap include stepping up efforts to attract women to technical and scientific careers and teaching business skills to school students.
Corporate lending in Germany is losing steam again. According to KfW Research, new lending has resumed its downward trend after a brief interruption. In the third quarter, banks extended 4.6% more loans to businesses and self-employed persons. Although this is still a strong increase, it is well below the 7.0% recorded in the second quarter.
The weak economic outlook, the industrial recession and multiple political uncertainties have dampened the appetite for new loans among both banks and businesses – despite the low interest rate levels. This is slowing down new lending momentum. We expect this trend to continue into the new year.
The business climate in the German venture capital market has deteriorated. The early-stage segment indicator fell by 6.1 points to 16.8 balance points in the third quarter of 2019. VC investors rated their current business situation more positively again but pessimism around their expectations returned. The indicator for the current business situation rose to 26.5 balance points (+2.7), while the indicator for business expectations fell sharply to 7.1 balance points (-14.8).
Sentiment in the later-stage of the German private equity market continues to deteriorate. The business climate indicator of the later-stage segment fell by 3.3 points to 6.4 balance points in the third quarter of 2019. Private equity investors rate their current business situation almost as positively as before but have more pessimistic business expectations, so positive and negative assessments are now balanced. The indicator for the current business situation remains hardly unchanged, at 13.1 balance points (-0.7), while the indicator for business expectations fell to -0.3 balance points (-6.4).
The boom of the credit market in Germany does not seem to come to an end. New lending business, as estimated by KfW Research, expanded in the second quarter by a strong 7.1% year-on-year. Thus, growth momentum was boosted once again. The main driver, however, was new business with short-term loans. These are often used to finance inventories or liquidity bottlenecks. For this reason, the most recent development is probably an expression of the weak economy, which is clouding the prospects for the lending business.
Last year was again characterised by all-time highs for Germany’s SMEs (‘Mittelstand’). Employment in small and medium-sized enterprises (SMEs) broke another record, turnovers continued to soar and investment increased again. The KfW SME Panel 2019 also reveals that enterprises were more successful than ever in loan negotiations. Borrowing preferences once again shifted towards long-term bank loans. SMEs continue on the path of growth in 2019 but the momentum is clearly slowing. As the economic outlook dims, SMEs’ recession fears are growing – if on a high level for the time being. Overall, businesses face a year of uncertainty.
The business climate in the VC market is recovering after two major setbacks. The business climate indicator of the early-stage segment rose by a strong 13.2 points to 23.2 balance points in the second quarter of 2019. VC investors are more positive about their current business situation but, in particular, they hold much more optimistic business expectations again. The sentiment indicators for the VC market environment, however, are increasingly deteriorating.
Sentiment in the later stage of the German private equity market has fallen for the fourth consecutive quarter. The business climate indicator of the later-stage segment dipped slightly by another 2.7 points to 10.1 balance points in the second quarter of 2019. Equity investors are more downbeat about their current business situation than before but again hold more optimistic business expectations. The indicator for the current business situation fell to 14.1 balance points (-9.5), while the indicator for business expectations climbed to 6.1 balance points (+4.1).But despite the cooling business climate, most assessments of the later-stage market environment remain in the green.
For the 3rd time, KfW Group, together with 17 trade associations, has surveyed the businesses on their digitalisation activity. The most relevant results are:
- Two thirds of businesses (66%) have plans to implement digitalisation projects in the next two years. These plans can be observed in all business sectors
- Problems come in to focus with increased commitment to digitalisation
- Data security / data protection and lack of IT competences, including a shortage of qualified IT workers, as well as difficulty adapting the organisational structure and work organisation are the biggest hurdles
Financing climate remains strong despite economic headwind
In cooperation with 17 trade associations, KfW Bankengruppe has conducted a company survey on banking behavior and financing for the 18th time.
The most important results are:
- The economic climate continues to be at an all-time high despite the economic slowdown
- The proportion of companies reporting difficulties in accessing credit has fallen by one-third compared to the year 2012
- Small businesses, however, continue to face significantly greater difficulties in accessing credit than large companies
- Personal contacts and their continuity are very popular with companies despite the trend towards digitization; however, the proportion of companies that value online offers is growing rapidly
At the start of the year, the corporate lending market was still booming in Germany. According to estimates by KfW Research, new lending growth was 6.4% on the previous year, almost as strong as in the final quarter of last year. It thus expanded well above average again.
This figure is surprising given the economic slowdown that has been observable since mid-2018. But apparently it was also driven by a special effect generated by the German automotive industry. This effect should fade soon. As economic momentum slows, the growth rate of new lending to businesses and self-employed persons is set to decrease noticeably.
Sentiment in the German private equity market continued to fall after the turn the year. In the first quarter of 2019, the business climate index of the German Private Equity Barometer dropped by 3.1 points to 64.7 balance points. At the same time, the VC business climate continued to be very good despite the decline, while the later-stage climate stabilised on what is still a “good” level. The market environment exhibited varying developments. The fundraising climate improved to just under its all-time high, while assessments of the level of deal flow rose to a new record. Furthermore, the pricing climate eased noticeably. On the other hand, exit opportunities deteriorated sharply and pressure on write-downs increased.
Bank loans were still in demand among German businesses and self-employed persons in the final quarter of 2018. At the end of the year the corporate loan market was, as expected, quieter than in the summer but new credit business, as estimated by KfW Research, expanded by 6.6% on the previous year at still above-average speed.
The slowdown of economic growth and increasing pessimism within companies will likely be increasingly reflected on the credit market in the next few months. We therefore expect the momentum in lending to slow down. The incentives generated by low interest rates and favourable financing conditions should, however, allow us to see further growth.
Focus on Economics
SMEs have traditionally maintained a close relationship with the banking sector. The ‘principal bank concept’ is widespread in the SME sector and 93% of all enterprises do business with a preferred credit institution. They have very long-lasting relationships that average 20 years. The special analysis conducted by the KfW SME Panel also found that enterprises seek face-to-face interaction even as the branch network shrinks. In 2017, around 65% of SME managers visited a bank branch at least once, on average once every quarter. In general, diversification in banking increases with the size of the enterprise. Large SMEs maintain more business relationships with banks and savings banks, visit local branches more often and focus less on their principal bank for their borrowing needs.
Sentiment in the German private equity market continued to decline at the end of the year. In the fourth quarter of 2018, the business climate index of the German Private Equity Barometer fell by 4.2 points to 67.9 balance points. But although confidence was lower in the second half-year, 2018 was on average the year with the best business climate since 2003 when the German Private Equity Barometer was launched. But sentiment was divided at the end of the year. While the business climate set a new record in the venture capital segment, it cooled yet again in the later-stage segment.
Economics in Brief
Access to finance is a major prerequisite for micro, small and medium-sized enterprises in developing countries to be able to use investment and growth opportunities. It is also an enormous challenge for many MSMEs. This applies to Africa more than to any other region in the world. Here, access to finance is by far the main obstacle for MSMEs. Still, it is possible to identify positive developments in many African countries.
Focus on Economics
Many businesses deplore that high costs, high risks and financing difficulties are making it hard for them to innovate. This study therefore examines whether differences exist in the financing of capital expenditure and innovation and whether these differences may be a sign of limited innovation finance opportunities. In fact, innovation finance is clearly distinct from investment finance. The findings confirm theoretical considerations that specific characteristics of innovation (such as uncertainty about success, difficulties in assessing projects and lack of collateral) are a barrier to external financing with bank loans in particular.