KfW-ifo SME Barometer: Small and medium-sized enterprises ready for recovery

• Boosted by greatly improved expectations, SME business sentiment brightened significantly in May
• Large enterprises see their current business situation much more positively
• For the first time in two years, companies of both size classes are planning to hire more workers

The third wave of coronavirus infections has been contained, the vaccination rate is rising and there are genuine prospects for continuing relaxations of lockdown rules in more and more regions. This good news has quickly lifted the spirits of small and medium-sized enterprises. Their business sentiment has risen by 6.3 points to 5.7 balance points, returning to positive territory for the first time since the beginning of the pandemic. The most recent rise is bolstered primarily by a much more optimistic outlook on the coming six months. SMEs upgraded their business expectations by an extraordinary 8.8 points to 11.3 balance points, the highest level in four years. At the same time, business situation assessments climbed 3.8 points to -0.3 balance points.

In May, sentiment among large enterprises continued to improve as well, again driven exclusively by significantly better assessments of the current business situation, as was already the case in April (+5.3 points to 10.5 balance points). By comparison, business expectations dropped by a moderate 1.0 points but continue on a high level, at 12.4 balance points. This consolidation of expectations was probably due to the current shortages of important intermediate goods and raw materials, which is why businesses' output currently cannot fully keep up with growing demand. Overall, business sentiment among large enterprises is up by 2.1 points to now 11.7 balance points. It remains much higher than among SMEs, but the gap has almost halved since April.

Differences in business sentiment between individual economic sectors also tended to converge in May, raising the overall level of confidence in nearly all sectors and company size classes. Besides wholesale businesses, segments that suffered severe restrictions due to the pandemic such as SME retailers and services reported significant improvements. The further outlook for domestic segments such as retail is good as the job market is now also signalling an improvement. Thus, in May SMEs’ employment expectations grew by 5.3 points to 8.6 balance points and those of large enterprises climbed 3.6 points to 3.2 balance points. This is the first time in two years that employment plans are positive again in both company size classes at the same time. Services businesses that rely very much on personal contacts are making a major contribution to this, as they will likely hire more workers again as coronavirus restrictions are relaxed.

Dr Fritzi Köhler-Geib, Chief Economist of KfW, commented on the May findings of the KfW-ifo SME Barometer as follows: “it’s all systems go for the German economy "it's all systems go for the German economy, with businesses feeling upbeat about the future and ready for the recovery. Mirroring the brightening economic sentiment, companies’ employment plans have switched to growth. That is very promising! But amid all the optimism there is still a need to be cautious. Lifting regulations too quickly might put Germany at risk of gambling away the most recent successes in containing the pandemic. If we open up carefully I am confident that the German economy will experience a strong growth surge in the further course of the year thanks to catch-up effects in the services sector and a progressive easing of shortages in the manufacturing supply chain. Despite the gloomy start to the year, gross domestic product is set to grow by 3.5% in 2021 and then by as much as 4.0% in 2022.”

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