KfW-ifo SME Barometer: the dry spell continues

• Fourth consecutive drop in business sentiment

• Sharp drop in situation assessments, minor dip in expectations

• Steeper decline in confidence among large enterprises

The current KfW-ifo SME Barometer shows that SME business confidence remains in the doldrums. Sentiment dropped by 2.9 points to -18.7 balance points in August, the lowest level since the acute energy worries in October of last year. Situation assessments fell more sharply than expectations, as they did in July, dropping by a notable 4.5 points to -10.6 balance points.

The real economy appears to be increasingly impacted by monetary policy tightening, while inflation-induced cost and price pressure are slowly easing. Expectations fell by 1.5 points to -26.3 balance points.

SMEs across all main economic sectors were more pessimistic in August than in the previous month. Retailers reported the smallest decline in business sentiment, which dipped by -0.3 points to -17.3 balance points. Confidence among service providers fell by 6.4 points to -12.1 balance points. Sentiment was significantly more subdued in manufacturing (-3.4 points to -24.8 balance points), construction (-3.0 points to -24.6 balance points) and wholesale (-1.3 points to -30.1 balance points).

The mood among large enterprises soured considerably, after remaining steady in the previous month. Their business confidence dropped by 3.5 points in August and is now at -29.1 balance points, well below the level of SMEs. Whereas large enterprises reported the same deterioration in situation assessments as SMEs (-4.5 points to -22.4 balance points), they downgraded their expectations more sharply in August (-2.7 points to -35.3 balance points).

“Following the mild technical recession in the past winter half-year and stagnation in the spring quarter, the German economy has been treading water for quite some time now, with business sentiment remaining in the doldrums for a further month – the fourth consecutive one”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

“But there is reason for cautious hope. Noticeable wage increases, an employment level that appears to be nearly steady in light of the skills shortages and falling inflation will likely give new impetus to consumption going forward while mitigating the dampening effects of increased financing costs. For manufacturers, on the other hand, the situation remains difficult, although they still have a strong volume of orders in their books. Overall, the economy will likely need to take baby steps to work its way out of the broad economic trough. After the unfavourable start to the year, I expect German GDP to contract by 0.4% across 2023 as a whole despite the consumption-driven stabilisation expected for the coming months. It is unlikely to expand again before 2024, with the new summer forecast of KfW Research predicting moderate growth of 0.8%.”

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