SMEs are becoming increasingly nervous

• SME business sentiment drops for the third month in a row
• Companies react sensitively to financial market turmoil and Brexit debate
• Real economy, however, remains on track

The pessimism caused by the financial market turmoil and unresolved issues in Europe, especially in connection with the Brexit debate, has increasingly carried over to Germany’s small and medium-sized enterprises. The KfW-ifo SME Barometer shows that SME business confidence fell noticeably by 3.8 points to 10.9 balance points in February. That is the third consecutive month-ly decline. In particular, SMEs are increasingly concerned that the outlook for 2016, which was positive until recently, could suddenly deteriorate. Business expectations of small and medium-sized enterprises dropped sharply by 5.3 points to -1.1 balance points. This is the first time since October 2014 that expectations fell below the zero line, which represents the average value since 1991. The current business situation, in contrast, is still seen exceptionally positively by SMEs despite a dip of 2.3 points to 23.0 balance points.

In difference to the previous month, the downturn in sentiment among SMEs is spreading beyond export-oriented manufacturers. Sentiment indicators fell on a high level in all SME sectors, particularly in the small and medium-sized retail sector. Among large enterprises the downward spiral in sentiment that had begun in the previous month continued almost unchecked in February, falling by 4.8 points to 3.2 balance points. With situation assessments remaining nearly stable, this decline is almost exclusively due to the drop in expectations.

‘It is hard to stay calm in light of the KfW-ifo SME Barometer’s negative Feb-ruary results. But still, the great intensity of the decline in what is fundamentally an unchanged real economic environment is a particularly strong indication that sentiment is being weighed down by acute fears and concerns, and not by actual economic trends, said Dr Jörg Zeuner, Chief Economist of KfW Group. He added that although downward risks were rising it was too early to throw in the towel. ‘The fundamental conditions for a continuing upswing in Germany remain favourable, with both construction and private and public consumption expenditure driving the domestic economy. And thanks to the recovery of many smaller countries, the global economy will presumably grow slightly more strongly. We expect Germany’s economy to grow 1.7% this year. Nevertheless, in the months ahead we will have to monitor very closely whether the slump in sentiment will trigger a self-fulfilling downward spiral – particularly through the avenue of investment restraint which, from today’s perspective, is excessive.’

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