“Mind the financing gap II”

The key chart

Summary

The latest ECB/European Commission SAFE survey indicates that SMEs in the euro area (EA) are facing similar challenges to their UK-based peers.

• SME turnover and profits were declining across the EA before the Covid-19 pandemic hit, despite accommodative financing conditions
• Weaker turnover and lower profits have become obstacles to obtaining external finance for the first time since 3Q14 especially, but not exclusively, in southern Europe
• The weakening economic outlook is compounding these trends with significant deteriorations noted in Germany, Italy and Finland
• The survey indicates that SMEs see the availability of internal funds declining substantially and by more than during the 2012 sovereign debt crisis
• External financing needs are rising, unsurprisingly, but SMEs indicate that they expect the availability of these funds (loans, credit lines and overdrafts) to deteriorate sharply, but to a lesser extent than the availability of internal funds.

Unorthodox monetary policy has been successful in reducing financing costs for SMEs in the EA and in the UK, but the challenge of accessing funding in sufficient volumes and in the face of declining operating performance remains.

SMEs in the EA are signalling rising operational, economic and financing risks and a widening financing gap vis-a-vis large corporates, raising concerns for investors in the sector and banks with relatively high SME exposure.

Introduction

I highlighted the widening financing gap between large UK corporates and SMEs in “Mind the financing gap” earlier this month. In this post, I summarise the results of the ECB/EC’s Survey on the Access to Finance for Enterprises (SAFE). This was conducted between March and April this year and the results were summarised in the ECB’s latest Economic Bulletin.

The key message from the euro area (EA) is similar to the UK version – while SMEs are benefitting from lower funding concerns, they are reporting a deterioration in activity and rising concerns about the future availability of external financing. Policy measures need to reflect and adjust to these concerns.

The charts that matter

SME turnover and profits were declining across the EA before the Covid-19 pandemic hit and despite accommodative financing conditions. Turnover declined across the region for the first time since early 2014. Italian SMEs were hit particularly hard (19% fall), followed by SMEs in Slovakia, Greece and Spain.

SMEs also reported a sharp deterioration in profits, from -1% in the previous survey to -15%. Italian SMEs stood out again, with profit declines of 36%, followed by Greek, Slovakian and Spanish SMEs. This occurred despite accommodative financing conditions, with high labour costs highlighted as a key contributing factor, and the “industry” sector hit relatively badly by declining profits.

Weaker turnover and lower profits have become obstacles to obtaining external finance for the first time since 3Q14. This applies across the EU (with the exception of Greece) but is particularly severe in Spain, Italy and Portugal.

The weakening economic outlook is compounding these challenges with significant deteriorations noted across the EA and particularly in Germany, Italy and France. The net percentage of firms signalling that the weakening in economic outlook was affecting access to finance rose to -30%, a level not seen since 1Q13.

The survey indicates that SMEs see the availability of internal funds declining substantially and by more than during the 2012 sovereign debt crisis. External financing needs are rising, unsurprisingly, but SMEs indicate that they expect the availability of these funds (loans, credit lines and overdrafts) to deteriorate sharply, but to a lesser extent than the availability of internal funds.

Conclusion

Unorthodox policy has been successful in reducing financing costs for SMEs in the EA and in the UK, but the challenge of accessing funding in sufficient volumes and in the face of declining operating performance remains severe. The risks to SMEs are rising as are the risks for those banks with relatively high SME exposure.

Please note that the summary comments above are extracts from more detailed analysis that is available separately.