KfW-ifo SME Barometer: Pessimism is spreading to Germany’s SME sector

• Drop in expectations is dragging SME business confidence down, situation assessments remain good
• Massive deterioration in sentiment among large enterprises
• Business cycle starts the year on a weak note

German SMEs are increasingly worried about the direction of the economy. The KfW-ifo SME Barometer revealed that the business climate of small and medium-sized enterprises plummeted by 3.0 points to 8.3 balance points in January. This decline was caused exclusively by SMEs’ significantly more subdued outlook on the half-year ahead. Their business expectations plunged by 5.5 points and, at -6.9 balance points, have now dropped father below the zero line which stands for the long-term average. By contrast, SMEs continue to be most satisfied with their current business situation. Their situation indicator remained unchanged at an outstanding 25.1 balance points, matching the high level already achieved around one and a half years ago.

Concerns about the economy are currently even more pronounced among large enterprises, however, where sentiment literally collapsed at the start of the year. Their business climate plunged 5.6 points and is now at only 0.6 balance points, hardly any better than the long-term average. At the same time, large enterprises’ business situation assessments fell by a relatively moderate 2.7 points to 12.3 balance points. But their expectations literally crashed, dropping a full 8 points to now -10.1 balance points.

The KfW-ifo SME Barometer also illustrates very clearly that the main economic worries are caused by international conditions. Growing concerns over a no-deal Brexit after the UK Parliament’s unexpectedly clear rejection of the painstakingly negotiated withdrawal agreement with the EU are by no means the only factor, but probably the most prominent one at the moment. The United Kingdom is the destination of a good six per cent of Germany’s exports and thus its fifth most important foreign market. But the cyclical outlook in China and the US is also increasingly uncertain and tensions in global trade relations have not eased. The pessimism that has shaped large export-oriented enterprises for quite some time has now spread to SMEs.

Thus, after SMEs across all sectors and size classes enjoyed above-average confidence indicators for a long time, this positive picture was significantly marred in January. The declines were particularly pronounced in manufacturing and wholesale, two sectors that are closely integrated into the global economy and therefore particularly sensitive to international pressures. Business sentiment fell clearly into negative territory among large manufacturing firms (-5.3 points to 3.1 balance points) and in the wholesale segment (-13.6 points to -7.2 balance points). The SMEs of these two economic sectors likewise reported substantial declines in business sentiment (manufacturing: -4.4 to 2.3 balance points; wholesale: -5.0 to 2.0 balance points). Furthermore, the negative sentiment is becoming increasingly entrenched among large retailers, which include a relatively large number of car dealerships – an indication that the problems resulting from the introduction of the new WLTP emissions standard on 1 September last year could be more persistent than initially thought. The decline in business confidence among construction firms of both size classes, on the other hand, is probably the result of the unusually cold winter weather and only temporary.

“The January results of the KfW-ifo SME Barometer are a clear warning. The only positives were the consistently good business situation assessments of SMEs”, said Dr Jörg Zeuner, Chief Economist of KfW. “As most of the small and medium-sized enterprises are strongly oriented to the domestic market, they benefited from growing employment, rising real wages, low interest rates and an expansionary fiscal policy. These continuing, very solid conditions for domestic demand should prevent Germany’s growth from coming to a complete standstill in 2019. However, the economy is currently shifting down two gears, so real growth for the year 2019 as a whole should hover around the one per cent mark”, said Zeuner.

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