KfW-ifo SME barometer: SMEs satisfied, but nervous about the future

• Slight improvement in business climate of small and medium-sized companies
• Positive trend also evolving for large companies
• Yet risk of protectionism continues to shape economic sentiment

The current KfW-ifo SME barometer shows that German SMEs are satisfied yet tense against the backdrop of the ongoing global trade conflicts: for the first time since the beginning of the year, sentiment among small and medium-sized companies brightened again in July. Their business climate improved by 0.9 points to 14.7 balance points. Assessments of the current business situation climbed to 28.1 balance points, a very high reading by historical comparison. By contrast, the expectations of SMEs fell by -0.3 points to 2.1 balance points.

Large companies also reported a better business climate in July (+0.6 points to 11.0 balance points). However, the slight decline in situation assessments, by 0.8 points to 23.5 balance points, contrasts with the expectations that rose by 1.6 points to -0.5 balance points.

The fact that the risk of protectionism continues to influence the business climate becomes clear when looking at the industries. Generally speaking, the closer the relationship to world trade, the more marked the climate deterioration has been since autumn last year. Not surprisingly, the negative trend is most pronounced among the large export-oriented industrial companies. Sentiment in the wholesale sector, which operates at the interface between national and international markets, is also steadily darkening. The sentiment among construction companies, in contrast, remains almost euphoric. The business climate in both size classes is reaching a new all-time high.

"All in all, the July results of the KfW-ifo SME barometer show that the German upswing is not in danger, at least in the short term. Companies are still very satisfied with current business," explained Dr Jörg Zeuner, Chief Economist at KfW. The development of the global risk situation and the extent to which trade policy tensions and other uncertainties such as Brexit impact on companies' investment appetite are decisive for the continuation of the upswing: "The fact that business expectations have crumbled close to long-term average levels suggests that companies are tensely awaiting a favourable outcome, and not that there already is rampant pessimism," Zeuner said. The recent trade rapprochement between the EU and the USA, which came as a surprise only after the end of the July survey, has eased the conflict, at least in the short term. This is good news for a continued upswing in principle, but the downside risks, including a renewed escalation of the trade conflict by the USA, remain considerable.

The current KfW-ifo SME barometer is available for download at: www.kfw.de/KfW-ifo-SME-Barometer.