OREANDA-NEWS. August 6, 2012. The mood in the German SME sector is increasingly subdued, as indicated by the KfW-ifo SME barometer from July. The business climate dropped for the fifth time in a row, namely by 1.2 points to 9.4 balance points. This is due solely to the again pessimistic assessment of business expectations for the coming 6 months, which declined by 2.4 points and is now below its long-term average value with -4.4 balance points. German SMEs consider the prospects for the future to be as weak as in autumn 2011. They assess their current business situation more optimistically: The corresponding indicator is robust and with 23.4 balance points continues to maintain a compara-tively high historical level.

While the SME sector overall presents a stable picture, the mood in large enterprises is following a steep downward trend. After the massive slump in June, expectations slipped markedly by another 5.1 points to -14.6 balance points. The last time large enterprises had such a negative view of the fu-ture was in June 2009. Large enterprises again provided a worse assess-ment of their current business than in the previous month (-2.3 points); how-ever, the indicator for the current situation depicts a business situation that is above average with 19.1 balance points. Overall, the business climate assessment by large firms cooled to 1.9 balance points (-3.8 points). The reason for the stronger pessimism among large enterprises probably lies in the greater importance of exports for this business size category. As a re-sult, larger firms are more vulnerable to a drastic worsening of the Euro crisis and a subsequent drop in international demand.

The employment plans of enterprises were not completely spared from the cooling down of the business climate. In the SME sector the indicator de-creased slightly by -0,5 points to 8.9 balance points, with large enterprises experiencing a decline of -4.1 points to 9.9 balance points. Despite this de-cline, the employment plans continue to remain significantly above the long-term average and can be characterised as moderately expansive.

Overall the sentiment captured by the KfW-ifo SME barometer reflects the enormous insecurity of enterprises regarding the future of the euro area and the associated extraordinary downside risks for the economy. Due to the continuing recessionary development in the European crisis countries and the dimension of the problems, doubts are growing in enterprises that poli-cymakers will still be able to successfully contain the Euro crisis. Against this background, business expectations have disconnected from the still robust economic development and are already anticipating a marked drop in growth.

The Chief Economist of KfW Bankengruppe Dr Norbert Irsch commented: "The governments of the euro area and the ECB still face the challenge of counteracting the escalation of the Euro crisis with decisive and sustainable crisis management. In any case, German exporters must expect continuing sluggish demand from the Euro countries under pressure to consolidate. If this remains in reasonable bounds, the good condition of the domestic economy will ensure economic stability. Along with the low financing costs for enterprises, the strength of the German job market remains a central pillar of the economy, even if the decrease in unemployment is levelling off. This is evidenced by the rapid increase in standard wages in April and the more cautious, but still expansive employment plans of enterprises."