KfW Research: KfW-ifo SME Barometer: downturn at the end of the year

• SME business sentiment dropped by 3.1 points in December
• Situation assessments slightly lower, expectations fell significantly
• Moderate, consumption-driven economic growth still likely in 2024

While business sentiment among small and medium-sized enterprises in Germany still rose in the previous months, it suffered a setback at the end of the year and fell by 3.1 points to - 19.1 balance points, according to the current KfW-ifo SME Barometer. The decline in confidence among SMEs was primarily due to lower business expectations, which fell by 5.2 points to -24.4 balance points. Situation assessments fell by a moderate 0.7 points to -13.6 balance points in December. This put an end to the upward trajectory which SME sentiment embarked upon in September.

The downturn in sentiment is observable in nearly all main economic sectors. Small and medium-sized industrial firms, whose confidence plunged by 5.3 points to -24.0 balance points, were most affected. The main construction industry experienced a decline of -3.7 points to -28.8 balance points, while the services segment saw a drop of 1.6 points to -12.1 balance points. SME retailers were the only ones to report an improvement in December, with sentiment rising by 0.6 points to -11.2 balance points thanks to slightly more positive situation assessments.

Confidence fell among large enterprises as well in December (-2.7 points to -27.4 balance points). Besides more sceptical expectations, drivers here also include clearly worse business situation assessments.

“Despite the downturn in sentiment in December, a moderate economic recovery is on the cards for 2024”,

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

“After brightening in the previous months, SME business sentiment in December was a disappointment. Overall, however, strong increases in real wages and growing consumer spending are likely to bring back moderate economic growth in the coming year. The deterioration in sentiment was likely caused by the uncertainty that has emerged around the federal budget in the meantime. The negotiated compromise will probably reduce this uncertainty again, especially since the compromise provides for important programmes that support the transformation of industry to continue. The sharp decline in capital market interest rates on the back of a decline in inflation that has so far been faster than expected will help bolster business investment in 2024 and thus stabilise economic growth.”

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

www.kfw.de/mittelstandsbarometer