KfW-ifo SME Barometer: Negative sentiment is spreading to more and more parts of the economy

• SME business confidence has dropped again
• Sentiment among large enterprises falls below long-term average
• Germany is entering a cyclical slowdown

Good news was in short supply for the German economy again in February. The KfW-ifo SME Barometer shows that SME business confidence fell for the fifth consecutive month. After a decline of 1.5 points on the previous month, the sentiment indicator now shows a mere 6.5 balance points. Both indicator components contributed to the renewed decline. Business expectations for the next six months fell by 0.3 points to -7.1 balance points, while assessments of the current business situation were down 3.0 points to now 21.4 balance points.

Confidence also dropped further among large-scale enterprises, which have already been very nervous for quite some time now. They noticeably downgraded not only their business situation assessments (-4.4 points to 6.7 balance points), but also their expectations (-1.2 points to -11.3 balance points). The downward corrections for both sentiment components were significantly stronger than among SMEs. At now -2.7 balance points, business sentiment has slipped below the zero line, which represents the long-term average. The last time large enterprises were this pessimistic was in late 2014.

“The cyclical slowdown which began in Germany in the middle of last year is not over”, commented Dr Jörg Zeuner, Chief Economist of KfW Group, on the February findings of the KfW-ifo SME Barometer. “Real growth will probably remain meagre in the first quarter as well, before recovering as the year progresses. Because of the weak start to the year, I now expect only moderate GDP growth of 0.8% for all of 2019. But that will depend on whether Brexit is completed in an orderly fashion and whether the trade conflict of the US with China and Europe escalates further.”

Thus, it is primarily the international environment that is affecting the health of the German economy. Positive developments are definitely possible in the further course of the year, but so is a continuation or even exacerbation of the global risk situation. So it is definitely worrying that the downward trend in sentiment is now no longer limited to business areas with significant international involvement, especially manufacturing (SMEs: -0.9 points to 1.2 balance points; large enterprises: -2.5 points to -5.8 balance points). It is increasingly spreading to domestic parts of the economy, which have long appeared to be relatively immune and formed the stability anchor of the business cycle. This applies to the large service sector in particular, where the sentiment indicators in both size classes dropped further in February (SMEs: -3.4 points to 4.8 balance points; large enterprises: -1.6 points to 6.6 balance points). The downward trend is now also becoming apparent in the construction sector, even if the level of confidence here is still far better than in other sectors (SMEs: -0.8 points to 25.9 balance points; large enterprises: -7.1 points to 25.1 balance points).

There were some rays of light in February, however. Sentiment in wholesale, the sector at the junction between domestic and international markets, has recovered slightly on a low level (SMEs: +0.2 points to 2.2 balance points; large enterprises: +4.6 points to -2.6 balance points). Manufacturers’ export expectations also stabilised slightly but remained in negative territory (SMEs: +1.0 points to -2.6 balance point; large enterprises: +3.4 points to -2.5 balance points). The most noticeable signs of reassurance again came from the employment market. Employment expectations remained very significantly above the zero line in spite of the recent downturn among large enterprises (SMEs: +0.2 points to 8.9 balance points, large enterprises: -1.6 points to 8.8 balance points). The positive employment trend in combination with rising real incomes should provide sound, reliable underlying consumption momentum.

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