KfW-ifo SME Barometer Serious recession concerns among SMEs

• Fear of halt to gas supplies causes SME business confidence to plunge
• Situation assessments edge down, expectations fall further
• Recession ever more likely

After stabilising briefly in spring, business confidence among SMEs took another dive at the beginning of the summer quarter. In July, it fell by 9.5 percentage points to -15.3 balance points - losing almost four times the usual month change. Business expectations, which have been very pessimistic since the start of the war in Ukraine, fell by another 12.7 points, and at -34.8 balance points have reached a negative level previously only seen before major recessions. Above all, fears of a lengthy suspension of gas supplies due to maintenance work on the Nord Stream 1 pipeline are likely to have unsettled many firms at the time of the survey. The assessment of the current business situation fell sharply by 5.3 points in July as well. At +7.6 balance points, it is nevertheless still hovering over the zero line, which marks the long-term average.

The collapse in confidence in July affects SMEs in all sectors. Even among service providers, which have experienced a significant upswing in recent months thanks to the recovery in formerly pandemic-stricken sectors, business confidence has deteriorated by a considerable 10.5 points. Sentiment is especially muted in the retail sector. Retailers have already reported a slightly below average trading situation. In view of the impending loss in purchasing power as a result of massively increasing heating costs, future expectations are worse than at any time since the survey began.

Future inflation development is the only small bright spot on the horizon, as market price expectations for SMEs in July declined from a very high level for the third time in succession (-4.5 points to 38.2 balance points). The somewhat weaker demand for labour could also dampen prices over the longer term. Employment expectations have fallen by 5.2 points and are now only marginally above average.

With the collapse in confidence in July, the mood among SMEs is now more in line with that of large firms, which had recorded an even greater deterioration in the preceding months. With a decline of 2.9 points to -19.3 balance points, confidence among large enterprises continues to be worse than among SMEs.

Dr Fritzi Köhler-Geib, Chief Economist at KfW comments: “The current KfW-ifo SME Barometer reveals a broad deterioration in business sentiment in companies of all sizes and in all sectors. Above all, fears of a suspension of gas supplies due to maintenance work on the Nord Stream 1 pipeline are likely to have clouded the business outlook of many firms at the time of the survey. Although a complete stop has so far failed to materialise, the pressure on energy-intensive and consumer-oriented business sectors is nevertheless immense. Because even if gas flows from Russia continue at a low level, the threat of further losses in purchasing power will persist due to the massive increases in heating costs. Currently, the only rays of hope are the still very high order volumes in the manufacturing sector and the easing of the global supply bottlenecks revealed by some indicators. However, with a slowing global economy, the risk of cancellations is growing, and the supply crisis could be replaced by a weakness in demand.”

The current KfW-ifo SME Barometer is available at: www.kfw.de/mittelstandsbarometer