Germany’s SMEs have the summer blues

• Business confidence in August was down
• Situation assessments were clearly lower, but expectations rose to an annual high
• Large firms are much more pessimistic about the future
• Recruitment plans signal optimism

Germany's SMEs were left with the summer blues in August. The business climate, the key index of the KfW-Ifo SME Barometer, fell 2.5 points to 14.0 balance points. This was solely due to SMEs' poorer assessment of the current business situation, while their expectations of future business climbed to a new annual high.

In August Germany's small and medium-sized enterprises were much less positive about their current business than the month before: their situation assessments nosedived by 5.6 points to 21.7 balance points. The reasons for the sharp drop in satisfaction could be the supplier dispute with Volkswagen – which has since been resolved – and the volatile weather, which may have been detrimental to the sale of summer goods. At any rate, it is mainly the manufacturing and retail industries that rate their current business situation much worse than in July.

SMEs’ business expectations, on the other hand, continued to improve. They rose to 6.1 balance points (+0.4 points), their highest level this year. In view of the increased uncertainties about external trade, particularly as a result of the Brexit vote, that is a reassuring signal. It underscores that – given the small and medium-sized enterprises' relatively strong focus on the domestic market – the German economy can continue to rely on domestic demand.

Nevertheless, the new external burdens have left a visible imprint on large enterprises, the vast majority of which operate on international markets. Not only are their situation assessments much worse than the month before, plunging 5.9 points to 14.4 balance points. Unlike SMEs, they are also much more pessimistic about the future, with expectations down 2.5 points to now only 1.3 balance points. Business confidence among Germany's large enterprises thus fell 4.1 points to 8.0 balance points in August.

The construction industry is the only sector that has bucked the negative trend. Large construction firms reported a strong rise in sentiment by 2.6 points to a very high level of 29.6 balance points. Small and medium-sized construction firms, which are heavily involved in residential construction, are also in a buoyant mood. The sentiment indicator in the SME construction sector climbed to the fourth consecutive new all-time high in August (+0.4 points to 28.3 balance points).

Despite the gloomier business climate, hiring plans continue to signal optimism, up 0.2 points to 9.8 balance points in the SME sector and up 1.3 points to 11.9 balance points among large enterprises. Companies' willingness to create more jobs shows that they generally expect the positive economic trend to continue.

"There is no reason to abandon our quite optimistic economic forecast for 2016 and 2017. Admittedly, the Brexit will probably dampen corporate investment and exports at least in the second half of 2016. But continuing employment growth, rising consumption and residential construction remain reliable pillars of the economic upturn", said Dr Jörg Zeuner, Chief Economist of KfW Group. All in all, the German economy is expected to grow 1.8% this year and 1.3% in 2017, with the slower growth next year very largely due to the substantially lower number of working days. The underlying cyclical momentum will remain almost steady in both years and is quite decent given the overall environment. "The downturn in sentiment in August will likely remain a one-off", said Zeuner.

The current KfW-ifo SME Barometer is availabe for download at:
www.kfw.de/mittelstandsbarometer(only in german language).