KfW Research: Mood among German SMEs continues to sour

• KfW ifo Business Climate Index dips for the fourth straight month
• Not since the first pandemic lockdown have SMEs held a more negative view of their situation
• Retail trade and construction are bright spots

In August, SME sentiment deteriorated for the fourth consecutive month, albeit at a much more moderate rate than in July. The index fell by 1.3 points on the previous month to now -19.0 balance points. Negative indicator values signify below-average economic performance.

The situation assessment component of the business climate index fell by 1.9 points to -17.7 balance points. The last time SMEs rated their business situation more negatively was in July 2020 (-19.1 points), when the economy had just come out of the first pandemic lockdown. Six-month business expectations dropped by 0.9 points to -20.4 balance points, the lowest level in six months.

KfW evaluates the results of the Ifo economic surveys for the KfW-ifo SME Barometer, broken down by company size classes and economic sectors.

There are some bright spots, however. Business sentiment among SME retailers surged by 4.2 points in August to now -14.2 balance points.

“That could be a first sign that households’ real purchasing power, which has recently increased, is gradually also driving increased consumption”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW. Sentiment in the main construction industry decreased by only a moderate 0.4 points, potentially signalling that the trough has been reached in this segment, which is important for residential building.

Sentiment among large enterprises also fell in August – and more sharply than among SMEs. Their business climate index plunged by 3.5 points to -25.6 balance points. Unlike for SMEs, however, it was their business expectations that clouded over much more than their assessments of the current business situation. Upward outliers were large construction enterprises, which focus on commercial construction and below-ground projects. Their sentiment indicator improved by 3.4 points to -2.9 balance points, the highest level in nearly one and a half years.

“A bit of light and still a lot of darkness – this probably sums up the current mood in the German economy. Business sentiment is currently much worse than in previous stages when gross domestic product stagnated. The unusually negative mood is most likely the result of the great uncertainty in businesses, which are facing a multitude of transformative challenges and persistent global crises”,

said Dr Fritzi Köhler-Geib.

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

KfW-ifo SME Barometer | KfW