KfW Research: KfW-ifo SME Barometer: SME business sentiment is bottoming out

• Expectations rose moderately while situation assessments dropped further

• Sentiment picked up among large enterprises

• Economic weakness is being gradually overcome

SME business sentiment in Germany gradually began to bottom out towards the end of the summer. In September it slipped by only a minimal 1.0 points and now stands at -19.5 balance points. After four straight downturns, some of which were very steep, business expectations rose again slightly for the first time and stabilised the sentiment indicator. Specifically, expectations rose by 1.3 points to now -24.5 balance points. SMEs' situation assessments, on the other hand, dipped by a further 3.7 points to now -14.2 balance points, according to the current KfW-ifo SME Barometer.

A differentiated picture emerges among the main economic sectors in which SMEs operate. Service providers remain the most optimistic, even if they revised their business sentiment downward again slightly in September (-1.1 points to -13.0 balance points). Retailers retained second place on the sentiment leaderboard, with a nearly unchanged confidence level (-0.2 points to -16.8 balance points). Construction SMEs, however, which focus on residential construction, reported another sharp downturn in confidence, making them the sector with the worst sentiment among all SMEs (-2.9 points to -27.7 balance points). Wholesalers previously occupied the last place, but in September their confidence levels rose again slightly for the first time in quite a while (+2.5 points to -26.5 balance points). Manufacturers are also experiencing a rise in confidence with their business sentiment indicator improving slightly by 1.4 points to -22.8 balance points, although this still remains far below the average.

Large enterprises had good news to share in September. Their business climate improved by 2.2 points and now sits at -26.7 balance points. Situation assessments (+3.4 points to -18.9 balance points) and expectations (+1.2 points to -33.8 balance points) both rose moderately. The slight rise in sentiment rests on a broad basis because all main economic sectors reported an improvement on the previous month.

“The KfW-ifo SME Barometer for September paints a mixed picture with opposing sentiment trends in the main economic sectors and company size classes. Among SMEs, the slight improvement in expectations was coupled with a renewed deterioration in situation assessments",

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

"Such ambiguous indicator constellations can often be observed at the early stages of economic turning points and could be a sign that the economy has now bottomed out. A significant portion of the current burdens for businesses is of a temporary nature, and the outlook is better than the very subdued sentiment currently suggests. Noticeable wage increases, an employment level that appears to be nearly steady and the recent easing of the inflation rate should give new impetus to consumption in autumn and winter. After that, a relaxing of monetary policy may then begin around the globe in the later part of 2024. This is likely to be of particular benefit to Germany as a producer of capital goods. Their sales rise when interest rates fall. Now that a moderate contraction in the current year must be deemed an absolute certainty, I expect the German economy to gradually work its way out of the economic trough in the next quarters and grow by 0.8% in 2024.”

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