KfW-ifo SME Barometer: Business confidence in freefall

• SME business confidence fell sharply in all sectors in June
• Expectations were much weaker, and situation assessments also deteriorated
• Sales price expectations are now completely back to normal

SME business confidence literally plummeted in June. Its 5.4 point decline on the previous month was nearly as steep as it was immediately after natural gas deliveries stopped last September. The key sentiment indicator of the KfW-ifo SME Barometer has thus fallen by -11.8 balance points, slipping well below the zero line again, which marks the historical average. The main cause was a deterioration in business expectations, which fell by 7.3 points to a well below-average level of -21.7 balance points. But situation assessments also decreased by a noteworthy -3.2 points to -1.1 balance points, falling to a level just below the average. SME business confidence is on the decline in all sectors. Retailers and manufacturers recorded the steepest drop.

Business confidence among large enterprises took an even steeper nosedive than among SMEs. Their sentiment level fell by 9.4 points in June to a meagre -26.0 balance points. Business expectations also fell particularly steeply (-13.3 points) here and, at -35.4 balance points, are now almost as pessimistic as at the height of the energy crisis in late summer of 2022. Furthermore, at -15.3 points, situation assessments among large enterprises remain significantly worse than in the SME sector.

The only good news which the KfW-ifo SME Barometer for June has to offer relates to future inflation trends, as the decline in sales price expectations of the past nine months continues unabated. With +0.9 and -3.1 balance points, sales price expectations in the SME and large enterprise sector are now very close to or even just slightly below the historical average, which accompanied an inflation averaging around 2% since the beginning of the KfW-Ifo time series in the year 2005. In addition, employment expectations of businesses of both size classes have almost fully returned to normal, which suggests that wage pressure on inflation will tend to ease again going forward.

“The development of the KfW ifo Business Climate Index in June joins the string of disappointing cyclical data”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The temporary economic optimism of the spring has now evaporated. Instead, the German economy is currently in a kind of limbo.”

The surge in pessimism in the business community represents a downside risk to the current forecast of KfW Research, which like other instituions expects moderately negative growth for all of 2023 as a result of the weak start to the year but predicts at least a moderate economic recovery to set in not later than from the second half of the year.

“However, with significant nominal wage increases and simultaneously easing inflation, the conditions for a moderate recovery in consumption in the coming quarters are still in place. Moreover, as a positive side of the weaker economic outlook, the signs of a continuing decline in inflation are strengthening”

added Köhler-Geib.

The current KfW-ifo SME Barometer can be downloaded from:

www.kfw.de/mittelstandsbarometer