OREANDA-NEWS. June 8, 2012. The mood among small and medium-sized German enterprises experienced a veritable slump in May. The business climate, the main index of the KfW-Ifo SME Barometer, fell by 5.7 points to 12.9 balance points against the previous month. This is almost three times the normal monthly variation. Equally dramatic was the decline in the business climate assessment by large enterprises (-5.8 points to 12.3 balance points). SMEs and large companies alike corrected downward their assessment not only of their business expectations but also of their business situation. This is probably due primarily to the particularly strong increase in uncertainty following the inconclusive Greek elections, which has triggered increasing concern in the thus far robust German industry over where the debt crisis is heading.

The expectations of small and medium-sized enterprises fell massively in May (-5.7 points to 12.3 balance points). Given the sharp surge in uncertainty, deterioration in the climate essentially driven by expectations would have been quite plausible. More difficult to explain, however, is that the assessments of the current business situation in May did not deteriorate at a "normal" rate but took a nosedive. Among SMEs the downward correction of the situation assessments (-5.6 points to 24.5 balance points) was practically as pronounced as the slump in expectations, and among large enterprises (-10.3 points to 23.1 balance points) it was actually the primary driver of the climate deterioration.

It can be assumed that an acutely burgeoning, vague fear of recession fuelled by the looming escalation of the debt crisis has prompted enterprises to make a significantly more negative assessment not only of their prospects but, perhaps somewhat irrationally, of their situation as well. After all, currently there is little to suggest a genuine, accelerated or widespread cooling of the German economy. The hard facts last published about the German economy – incoming orders and industrial output in March and strong growth in real terms from first quarter exports and consumption – were actually a positive surprise across the board.

"We had expected the business climate to cool off because of the difficult environment, but not to this extent. The intensity of the decline therefore should rather be regarded as a panic attack that is disproportionate to the actual slowdown", said Dr Norbert Irsch, Chief Economist of KfW Bankengruppe. KfW maintains its forecast that the German economy will grow by 1.2% in 2012. "The sharp downward correction of the business climate both among SMEs and large enterprises in May, however, is a clear warning that must be taken very seriously", Irsch continued. It appears that people in Germany, too, are now losing faith in the ability of Europe's politicians to solve the crisis. The risk of a downward spiral driven by self-fulfilling negative expectations, in which fear is fuelled by fear, has grown immensely. If the uncertainty among enterprises keeps rising and ultimately spreads to private households, the German economy is likely to become substantially affected as well. Against this background the structural reforms aimed at improving the competitiveness of the enterprises and the efficiency of public administration in all of Europe should be continued, but financing scope should be taken advantage of to create incentives for growth that are effective in the short to medium term."