KfW-ifo SME Barometer: All signs point to an upswing

• SME business sentiment surges again
• Employment and price expectations have risen sharply
• Growth spurt in the further course of the year, Delta variant a risk

Boosted by the significant easing of the pandemic situation, all signs in Germany’s SME sector now point to an upswing. The current KfW-ifo SME Barometer shows that SME business confidence improved by a strong 6.7 points in June to 12.3 balance points. Both business sentiment components drove the increase: Situation assessments climbed 10.7 points – the second highest increase ever recorded – to 10.5 balance points. Only during the upturn after the global financial crisis was there slightly more impetus (April 2010: +11.5 points). SMEs also significantly upgraded their business expectations by 2.8 points in June. At 13.8 balance points, small and medium-sized enterprises are now more optimistic than at any time in more than ten years.

Sentiment among large enterprises also brightened in June (+3.7 points to 14.4 balance points), although driven solely by improved situation assessments, as was the case already in April and May. By contrast, business expectations of large enterprises now stand at 11.5 balance points, just barely holding the previous month’s level (-0.9 points). The continuing minor consolidation of expectations on a nonetheless still high level comparable to that of SMEs indicates persistent shortages of inputs and raw materials, which is why output, especially in the manufacturing and construction sector, cannot fully keep up with growing demand for the time being. On balance, business sentiment among large enterprises improved by 1.4 points to now 13.1 points.

Confidence levels are now positive in all segments of the national economy, both by sector and enterprise size class, meaning business sentiment is above the zero line, which stands for the long-term average. Those segments that benefited most from the easing of coronavirus restrictions and the return of social life reported the most significant month-on-month increases. SME retailers reported a particularly distinct improvement (+13.8 points to 17.8 balance points), as did SME service providers, which account for the bulk of contact-intensive offerings in the arts and culture, entertainment, hospitality and personal services (+11.0 points to 8.6 balance points).

The high confidence level in June is bolstered by businesses’ specific expectations about the development of employment levels and sales prices. Thus, SMEs’ employment expectations rose by 6.3 points to 14.5 balance points, which is in fact a new all-time high. The strongest contribution to the increase came from service providers, who are now looking to start hiring again after the significant relaxation of pandemic measures. Large enterprises’ business expectations rose by 4.3 points to 7.9 balance points. Sales price expectations for the next three months also rose steeply, reaching new record highs in both enterprise size classes (SMEs: +6.6 points to 30.7 balance points; large enterprises: +6.9 points to 28.1 balance points). The currently high short-term price expectations across the breadth of the business community are thus mainly a countermovement to the weak price trend since the outbreak of the pandemic and not a sign of long-term risks to price stability.

“All signs point to an upturn. That’s the good news of the KfW-ifo SME Barometer in June”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “A look at the streetscape alone is proof that the turnovers of most pandemic-stricken service providers have increased substantially. Many people are now catching up on all the things they missed during the long coronavirus winter. As they were able to save during lockdown periods, many might now be more willing to increase their spending. Regardless of the most recent drop in new orders in May, manufacturers and construction firms have had no significant sales problems for quite some time now, and instead have been grappling a bit more with supply shortages. But the bottlenecks and the post-coronavirus boom in manufacturing are two sides of the same coin. For all the problems caused by supply shortages, it is helpful to remember that severe excess demand a year ago would have been deemed a highly positive scenario. After a difficult start to the year, Germany can therefore look forward to a growth surge in the further course of the year. Still, it remains crucial – both for the government and for each individual – to take responsibility for the regained freedom. At the same time, the vaccine rollout must continue at a fast pace, especially given the accelerating spread of the highly infectious Delta variant of the virus.”

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