KfW-ifo SME Barometer Businesses are satisfied with their current situation but very anxious about what lies ahead

• SME business confidence stagnated in June
• Situation assessments have improved, but worries about the future are mounting
• Losses in purchasing power and looming energy crisis are causing pessimism

SME business sentiment in June was virtually unchanged from the previous month, with the corresponding index rising by 0.1 points to -5.7 balance points. Situation assessments improved for the third consecutive month after a minor setback in March, rising by 1.7 points to now 12.8 balance points. That means despite numerous adversities SMEs assessed their current business situation even more positively than in June last year, when the vaccination campaign and declining infection rates spurred German growth. By contrast, six-month business expectations are becoming increasingly pessimistic, falling by 1.2 points to -22.1 balance points. That now puts them well below the zero line, which represents the long-term average. In particular, the looming energy crisis in the coming winter from a possible halt of Russian natural gas supplies is making many enterprises anxious.

SME business sentiment in June differed substantially across sectors. The sharpest rise occurred in the construction sector, where confidence increased by 4.3 points to -3.8 balance points. Sentiment fell here in March and April, most likely due to the simultaneous exacerbation of material shortages. According to the current ifo survey, these shortages are currently easing. Retailers, in turn, suffered a veritable slump of 11.8 points to now only -17.8 balance points. The erosion in consumer purchasing power resulting from the strong increases in energy and food prices weighed particularly heavily on sentiment. According to the Gfk Consumer Survey, consumer confidence even plunged to a new all-time low in June despite the federal government’s relief package. Manufacturers currently face major problems as well. Confidence in the sector has also fallen sharply since March, particularly as a result of additional material shortages caused by the war in Ukraine and lockdowns in China as well as the acute risk of a shutdown of gas supplies from Russia. Business confidence among SME manufacturers fell again in June (-0.8 points to -10.5 balance points).

Sentiment among large enterprises was worse than in the SME sector, with confidence in June falling sharply by 5.4 points to a significantly below-average -16.4 balance points. Expectations and situation assessments both deteriorated considerably here after the brief improvement in May obviously turned out to be a flash in the pan.

Dr Fritzi Köhler-Geib, Chief Economist of KfW, commented: “Despite all adversities, the German economy and SMEs in particular experienced a reasonably satisfactory spring. But the generally solid assessments of the current business situation contrast with very dismal business expectations since Russia’s invasion of Ukraine. Most of all, the significantly higher probability that Russia will halt its supplies of natural gas is good reason for recession fears which are being further fuelled by the inflation-related loss of purchasing power and rapid monetary tightening through interest rate reversals initiated by central banks around the world. It is now necessary to maintain businesses’ appetite for investment, because investment is the only way to meet the current challenges, such as the energy transition which has become even more urgent since the outbreak of the war.’

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