KfW-ifo SME Barometer: Mood turned sour at start of 2nd half-year

• SME business sentiment fell for the third consecutive month
• Situation assessments are lower than expectations
• Confidence among large enterprises remains steady
• Economic stalemate continues

In terms of sentiment, the start to the second half of the year was a failure. In July, SME business confidence fell by a steep 4.4 points to -16.1 balance points from June. It was the lowest level of the sentiment indicator since November last year and already the third consecutive decline. This time, unlike in previous months, situation assessments plunged more steeply than expectations. They fell sharply by 5.1 points to -6.1 balance points and are now even further below the zero line, which stands for the long-term average. While inflation-reduced losses in purchasing power are slowly easing, the global restrictive monetary policy course appears to be weighing increasingly heavily on the real economy. Business expectations fell by a further 3.8 points to -25.2 balance points after the preceding downturns. The view of the future is now laced with roughly the same amount of pessimism as at the end of 2022, when enterprises were consumed by worries about an energy crisis.

The downturn in sentiment in July permeated all main economic sectors. Business confidence among services businesses fell 2.4 points to -5.8 balance points. The manufacturing sector experienced a similar drop of
-2.6 points. The downturn among retailers was slightly steeper (-3.4 points to -17.4 balance points). The inflation rate is falling from a high level, however, and combining with foreseeable increases in real wages to create hope for a pickup in consumption and, thus, retail spending. The sharpest downturns in sentiment were reported by wholesalers (-4.1 points to -29.7 balance points) and construction firms (-5.2 points to -21.2 balance points), which were particularly affected by increased financing costs.

Unlike SMEs, the sentiment level among large enterprises was almost unchanged in July (-0.2 points to -25.8 balance points). This was supported by a mild improvement in business expectations (+1.8 points to -33.0 balance points), which nearly cancelled out the downward revision in situation assessments (-2.8 points to -18.1 balance points). Large manufacturers and retailers even reported an improvement in business sentiment on June.

The phase of cyclical weakness is now reflected in employment expectations, too. For the first time since February 2021, they have fallen below the zero line again in both enterprise size classes (SMEs: -2.1 points to
-1.8 balance points; large enterprises: -3.5 points to -6.2 balance points). In the light of growing skilled labour shortages, it is nonetheless very unlikely for businesses to lay off workers to any appreciable degree.

The Chief Economist of KfW, Dr Fritzi Köhler-Geib, commented:

“The cautious optimism of spring that the German economy could pick up some speed again after the technical recession of the winter half of 2022/2023 has vanished. According to a Federal Statistical Office first release, GDP stagnated in the second quarter. The economic stalemate continues for the time being. The business cycle is stuck in the middle of the year in an economic no man’s land between a weak recession and a feeble recovery. Manufacturing was most disappointing thus far, since production remains stuck in a rut despite easing supply chain problems. The continuing above-average order volumes are set to provide at least some stability in the manufacturing sector over the coming months as well. Positive impetus could come from consumption, which ended its downward slide in the second quarter. In the months ahead, household purchasing power will be bolstered by easing inflationary pressure, an employment level that will likely remain almost steady, and noticeable wage increases. All in all, however, the coming quarters will at best see small steps towards an economic recovery. For 2023 as a whole, a positive growth rate is now beyond reach.”

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