KfW-ifo SME Barometer: SMEs have rebooted successfully – everything else depends on how the pandemic evolves

• SME business confidence continues to brighten
• Large enterprises have high hopes for improvement
• Rising coronavirus infections threaten to derail economic recovery

Small and medium-sized enterprises in Germany have started the summer quarter on a robust path of recovery, even if the pace has slowed somewhat. SME business sentiment improved for the third consecutive month in July, rising 7.9 points to -12.5 balance points. What is particularly encouraging is that situation assessments also improved (+7.3 points to -19.3 balance points). Business expectations have already rebounded more strongly and are now at -6.1 balance points, up 8.4 points.

Confidence also continued to rise among large enterprises in July (+9.4 points to -16.8 balance points). For the most part, their expectations are already positive, rising by 10.5 points to now 7.6 balance points. Still, this development needs to be seen against the background of particularly low starting levels. The fact is that despite the current strong 8.3-point increase, large enterprises are still twice as pessimistic about their current business situation as SMEs, at -40.6 balance points.

A look at individual sectors shows that confidence improved most notably among retailers in July. The temporary value-added tax reduction introduced appears to have a significant effect on small and medium-sized retailers in particular. Their situation assessments have returned to pre-coronavirus crisis levels, and business confidence is back to an above-average +8.2 balance points. But when the value-added tax rate is lifted again next year, retailers will have to factor in a reversal. Accordingly, their business expectations for the next six months are moderately negative.

Manufacturing continues to be the problem child of Germany’s business sector. Industrial SMEs were much more negative about their business situation, at -35.8 balance points, than SMEs of all other sectors. Their expectations for the future are now roughly neutral, but their business confidence in July rose by 10.3 points overall to -18.4 balance points. Large industrial firms were even more pessimistic about their business situation than SMEs (-71 balance points). But they, too, are mostly hopeful that things will improve. Business expectations of large industrial firms rose to 23.6 points, and their export expectations were also up sharply (+15.7 points to 10.3 balance points).

“After plunging into an abyss in April, small and medium-sized enterprises have managed quite a decent relaunch”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The fact that businesses were able to avoid falling into a depression after the deep slump is also thanks to the decisive public health and economic policy response to the pandemic. Many small and medium-sized enterprises were able to ride out the lockdown with grants and assistance loans. Furthermore, the brighter sentiment is not driven by expectations alone but has been bolstered by an improved business situation again since June. After the historic slump in the first half, the course is set for strong growth in the summer quarter.”

However, headwinds are also gathering strength. “Continuing high global infection rates are hurting export-oriented manufacturing in particular. Given the enormous uncertainty and crisis-induced losses, many businesses will spread out or defer their investment plans. The recent rise in new infections in Germany also poses a risk to almost all sectors”, added Köhler-Geib.

The current KfW-ifo SME Barometer can be downloaded from: KfW-ifo SME Barometer