KfW-ifo SME Barometer: SMEs are worried about the new year

• SME business sentiment continues downward trend
• Expectations are now below average, situation assessments remain very good despite decline
• Minor drop in sentiment among large enterprises, but construction is still booming
• Steady employment and price expectations indicate strong domestic demand

SME business sentiment has continued the previous month’s trend and shed 3.1 points as high situation assessments dipped and expectations turned significantly more pessimistic. At 11.2 balance points, however, it is still on a level that is well above the average and was hardly ever achieved before the euphoric sentiment of the past two years. These are the findings of the current KfW-ifo SME Barometer. SMEs’ situation assessments dropped by 1.6 points to 24.9 balance points but can still be regarded as excellent after the sharp rise they have experienced since the end of 2016. Not so their business expectations, however, which dropped significantly by 4.5 points and, at -1.4 balance points, are now slightly below the long-term average for the first time in more than two years.

Sentiment among large enterprises resumed the downward trend that has prevailed for more than a year after a cautious recovery in the previous month. It fell by -1.4 points to 6.1 balance points owing to less favourable situation assessments (-1.7 points to 15.3 balance points) and a more pessimistic outlook on the future (-1.1 points to -2.4 balance points).

Across the sectors, small and medium-sized manufacturers show a particularly high level of scepticism. Their business expectations dropped sharply by 6.6 points to -7.3 balance points, as did their export expectations (-5.8 points). Their situation assessments, on the other hand, remained on a high level (+0.4 points to 22.0 balance points). Overall, sentiment among manufacturing SMEs dropped by 3.4 points to 6.5 balance points. Meanwhile, the euphoria in the construction sector continued, and while SMEs were slightly less upbeat (-1.3 points to 36.8 balance points), large construction firms reached a new all-time high of 39.7 balance points. Sentiment among SME retailers also improved slightly (+0.6 points to 12.2 balance points), while large retailers were much more pessimistic (-5.4 points to -6.5 balance points).

“Situation assessments and expectations have been drifting apart more and more for quite some time. This could be taken as a sign of further weakening cyclical momentum. Recently, however, situation assessments have often overdrawn the momentum of the business cycle. The sober business expectations for the first half of 2019 therefore do not automatically mean slower GDP growth than in the previous year but might also have been influenced by the repeated downward revisions to recent economic forecasts”, said Dr Jörg Zeuner, Chief Economist of KfW. “Moreover, stubborn cyclical risks such as a Brexit without a withdrawal agreement or higher US tariffs on European automobile imports are dragging expectations down. But if the most acute risks fail to materialise in the coming months, the German economy should continue to grow at a decent pace thanks to strong domestic demand. KfW Research expects Germany’s economy to grow 1.6% in 2019.”

The current KfW-ifo SME Barometer can be downloaded from: www.kfw.de/mittelstandsbarometer(available in German only).