SME business confidence rises to new record level

• SMEs’ expectations and, above all, situation assessments have risen strongly
• Large enterprises are marginally less optimistic
• Euphoric sentiment overdraws what is nevertheless a strong business cycle

In June, business confidence among small and medium-sized enterprises in Germany rose by a distinctive 4.8 points – nearly two and a half times the usual monthly variation – to now 28.0 balance points. That makes June the second in only three months that confidence in Germany has climbed to new post-unification record highs.

The improving global economy and the faded political risk in Europe since the election in France drove businesses’ expectations up 3.4 points to 14.4 balance points. This surge in optimism is astonishing since the basis on which expectations are formed – the assessment of the business situation – simultaneously took a giant leap of 6.2 points to the unprecedented level of 41.8 balance points. It shows that a growing proportion of companies expect the current peak level to rise even further. While it is a sign of great optimism, the risk of disappointment is also rising should actual developments fall short of these soaring expectations.

Large enterprises were also very confident in June. However, business confidence improved much more moderately month-on-month than among SMEs, rising by 1.6 points to 24.4 balance points. This reflects a slightly less euphoric outlook on the future. While situation assessments improved noticeably (up +3.6 points to 38.1 balance points), business expectations were down slightly (-0.4 points to 11.0 balance points). ‘The drop may be an expression of continuing uncertainties in the relationship with the USA and the UK’, said Dr Jörg Zeuner, Chief Economist of KfW. ‘These will likely remain for some time to come and make large exporters in particular very anxious.’

A glance at the individual business sectors reveals the healthy state of the economy. Significantly higher confidence levels in retail and wholesale trade indicate that domestic demand remains brisk and can continue to rely on private consumption. SME wholesalers stand out most prominently, with a highly unusual month-on-month increase of 12.1 points to now 32.9 balance points. The construction boom in Germany is not set to end anytime soon either, as illustrated by the consistently excellent mood among construction firms. The very strong improvement in sentiment among industrial SMEs (+4.1 points to 25.9 balance points) and a rather moderate rise among large manufacturers (+0.7 points to 25.1 balance points) rounds off the positive profile of sectors.

‘German businesses are booming with confidence across all sectors with no exceptions’, said Zeuner. ‘This shows that the upswing rests on a broad foundation.’ The hard monthly cyclical indicators such as industrial output, incoming orders and exports, however, so far have not been able to impress with top results. The discrepancy may be due to the fact that companies rated the business climate quite positively already in the winter half despite the looming destabilisation of the euro area. The economic risks have since faded substantially, and that appears to have motivated firms to issue an even better assessment. ‘All in all, we assume that GDP grew at roughly the same rate in the spring quarter as in the first quarter (+0.6%)’, said Zeuner.

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