SMEs feeling the impact of weak growth in Europe, and bracing for harder times ahead

• KfW SME Panel 2014: Turnover positive, but no return to past strong growth in sight
• International business suffers setback, particularly in Europe
• Equity ratios still strong, but companies holding on to profits
• Higher levels of growth unlikely for 2014, with investment held back by the economy

SMEs demonstrated their central importance to the German economy in 2013, but have been unable to escape the weak growth in Germany and Europe – these are the findings of the KfW SME Panel 2014, the only representative analysis of the long-term structural development of the SME sector in Germany. While turnover and employment are on the rise, the pace of growth has slowed. International activities in particular are experiencing a setback. Europe is losing its momentum. At the same time, German SMEs are becoming increasingly profitable. In most cases, companies are holding on to these profits in order to boost their equity. They are still unwilling to invest despite their full pockets. This shows that SMEs are opting to wait and see, building up their reserves in case of any future downside risks.

SMEs have seen their turnover rise by 1.9% over the past year, despite growing competition and high levels of uncertainty. That is a good thing. However, growth has fallen by a fifth relative to 2012. Every sector of the economy failed to repeat the strong levels of growth seen in the past in 2013. The prospects for a substantial recovery in the medium term are low. Business expectations are being revised downwards yet again.

One factor is the economic weakness of many international sales markets. A total of 19.9% of SMEs were active in other countries in 2013 - a decline of three percentage points in comparison to the previous year. In 2013, the turnover generated by SMEs in other countries fell 7% to EUR 545 billion, with SMEs in the industrial sector suffering particularly heavy losses. Europe in particular is losing momentum. Turnover in Europe fell by EUR 27 billion.
Despite this, the average return on sales has risen 0.7 percentage points to an all-time high of 6.7%. SMEs are using this improved profitability to boost their equity. In 2013, the average equity ratio in the SME sector rose 1.2 percentage points to 28.6% - the strongest rise in this figure for almost a decade. In most cases, companies are holding on to their profits. Companies were reluctant to invest in 2013 (as they were in 2012), with spending on new equipment and construction stagnating at EUR 144 billion (-0.7%).

The SME sector remains a cornerstone of the German labour market, employing 28.6 million people or 68.3% of the total workforce in 2013 - 522,000 more people than the year before. The SME sector is also increasingly vital to the success of the dual education system. In 2013, 87% of all trainees started their training at an SME - the highest figure ever recorded.

"Conditions have become tougher for SMEs. Companies have responded to this, and are waiting to see how things develop despite their full coffers. While we are still seeing positive growth, expectations continue to slide,” said Dr Jörg Zeuner, KfW's Chief Economist.” Small and medium-sized enterprises are still hesitant to invest, and even easy access to credit will not do anything to improve this situation. SMEs will only start to invest significantly more when there is a lasting improvement in the outlook for Germany and Europe. There are no signs of this happening in 2014. A broad based change requires stronger public demand, continued low interest rates and far-reaching structural reforms in Europe".

The KfW SME Panel 2014 is available for download at the Research section of KfW's website (in German language).