Much gloom weighs on SME business climate, but rays of hope can be seen

• SMEs rate their situation more negatively, expectations are stabilising
• Business confidence in industry is trending downward, service providers are increasingly concerned, construction boom continues
• Stabilising business expectations may signal a bottoming out

Business confidence in the small and medium-sized enterprise sector continued to slip in May. The key indicator of the KfW-ifo SME Barometer dropped by 1.8 points to 5.9 balance points. Companies gave a much more pessimistic assessment of their situation in particular, with the indicator falling by 4.4 points to 17.4 balance points on the previous month. Their expectations of future business conditions improved minimally by 0.4 points. However, they remained below average at -4.8 balance points. Since February, however, there has at least been a trend towards stabilisation.

Business confidence among large enterprises fell by 2.6 points, an even sharper drop than in the SME sector. At -5.0 balance points, the indicator is now very clearly below the zero line, which represents the long-term average. In particular, large firms have been much more pessimistic about their business situation than small and medium-sized enterprises for quite some time. With a renewed plunge, this time by 6.8 points, the gap between both enterprise groups widened further. The generally pessimistic business expectations of large enterprises, on the other hand, stabilised slightly and rose 1.1 points to now -9.6 balance points. Large manufacturers are feeling the effects of stagnating global trade and are particularly pessimistic: their situation assessment fell by 10 points to -15.2 balance points. Based on this low level, their expectations of future business rose by 5.6 points but remained very pessimistic on balance at -12.6 points.

Business confidence among large service providers also deteriorated significantly in May. It dropped by 8.2 points to 0.1 balance points, which is still average. In the main, the downward trend is presumably driven by business service providers such as management consultancy firms, whose business is linked to the fate the industrial sector.

The almost exclusively domestically oriented sectors of the economy are a bright spot. Business confidence improved in both size classes of construction and civil engineering as well as retail. Given the strong first-quarter growth, which was partly due to favourable weather, the renewed boost in confidence in the construction industry is noteworthy.

“The driver of the economy at the start of the year was domestic demand, especially in construction and retail. Based on the findings of the current KfW-ifo SME Barometer, we expect it to remain buoyant in the second quarter as well. Export-oriented industry and related service sectors, which reported a slump in sentiment, will be facing much greater difficulties. As employment expectations among large enterprises are falling, hope remains that the lull in the manufacturing sector will not drag other sectors down as well. On balance, however, employment expectations are still positive. The SME sector in particular, with its relatively stable hiring plans, should serve as a stability anchor”, said KfW economist Philipp Scheuermeyer.

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