KfW-ifo SME Barometer: Second lockdown clearly has hit SMEs harder than large companies

• Confidence among small and medium-sized enterprises drops sharply
• Manufacturers stabilise sentiment among large enterprises
• German economy set to contract by around 1 % this quarter

The second wave of COVID-19 infections and the partial lockdown in Germany are leaving a clear imprint on small and medium-sized enterprises. SME business confidence fell by 4.5 points to -12.2 balance points in November. That is a significant drop, but still moderate compared with the decreases seen during the spring lockdown (March: -18 points, April: -25 points).

SMEs’ business situation assessments, however, remain relatively steady. After rising for five consecutive months, they fell by only a moderate 0.8 points to -10.3 balance points in November despite the restrictions imposed to contain the spread. This shows that while the lockdown almost completely shuts down activity in some sectors, most firms can continue operating relatively well. Business expectations in the SME sector, by contrast, fell by a notable 8.0 points to -14.2 balance points. Their concern over a hard winter obviously dominates the positive news on vaccine development.

Large enterprises’ situation assessments improved again in November (+3.6 points), while their expectations dropped by 5.1 points. On balance, overall business sentiment changed only little (-0.8 points to -7.4 balance points). This stability is due exclusively to the positive readings from large manufacturing (+3.3 points) and construction firms (+1.2 points), while large enterprises of all other sectors were more downbeat than in the previous month.

Unsurprisingly, a closer look at the individual economic sectors reveals that service enterprises in both size classes are currently the segment of the German economy with the most negative sentiment (SMEs: -8.5 points to -21.9 balance points, large enterprises: -6.7 points to -13.4 balance points). After all, this segment – which includes hospitality, entertainment, the arts, sport and most personal services – comprises those industries that have been directly affected by the lockdown since the beginning of November. Small and medium-sized retailers, however, also reported a significant drop in confidence, after it returned to a steady path to recovery in the previous month (-12.4 points to -1.9 balance points). High infection rates and official stay-at-home advice are clearly preventing more people from going to the shops.

“As a result of the second wave of infections in Germany and the partial lockdown that was recently extended until at least 20 December, the German economy will likely contract by around 1% this quarter. The current KfW-ifo SME Barometer shows that small and medium-sized enterprises in particular anticipate setbacks, even though they expect them tol be less dramatic than in the spring”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “In the short term, unfortunately, a relatively sweeping ban on business activities with high risk of infection will be inevitable. Over the medium term, however, the successes in vaccine development mean there is much light at the end of the tunnel.”

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