KfW SME Panel: businesses are using their financial strength, but not boosting investment

• Consumption and residential construction sustain turnover and profitability
• SMEs are a job engine: employment soars
• Investment remains stalled, favourable financing environment provides no additional incentive
• SMEs show their financial power, investing more of their own resources than ever before

The German SME sector is in excellent shape. In 2015 small and medium-sized enterprises continued their strong performance of the previous year. Turnover grew at a steady rate of 3.3%, profit margins posted a further 0.3% rise to now 7.3%, their equity ratio is approaching 30%, and the proportion of businesses reporting losses fell to a historic low. All of that underscores the strength of Germany’s SMEs. Those are the findings of the KfW SME Panel 2016, the only representative survey of Germany’s SMEs.

The SME sector is and remains the mainstay of the German labour market. The number of persons employed by SMEs continued to rise in 2015 as well. It grew by around 460,000 persons, or 1.6%, to 29.5 million. The proportion of SMEs in aggregate employment reached an unprecedented 68.7% (+0.6 percentage points). The aggregate increase on the previous year was brought about solely by the SME sector. Large enterprises and the public sector, in turn, reduced their workforce by some 180,000.

Dr Jörg Zeuner, Chief Economist of KfW Group, drew the following conclusions from the results of the current KfW SME Panel: "The German economy is growing in 2016 as well. We can count on domestic demand. The optimists in the business sector are gaining the upper hand, which is indicative of a robust and positive development in the SME sector. We expect it to keep up the solid pace of growth in turnover and employment. SMEs are more than living up to their reputation as a job engine. In 2016 they will employ more than 30 million persons."

Despite what remains a favourable financing environment and a further reduced interest burden (minus EUR 5 billion on 2014), investments remain stalled, not least because micro-businesses are exercising restraint. SMEs’ propensity to borrow to invest generally decreased (510,000 SMEs held loan negotiations). Borrowing declined last year, also because access to credit became less accessible for micro-businesses. Instead, SMEs were increasingly tapping into the financial buffers they built up in recent years. The volume of investment expenditure funded from businesses’ own resources was higher than ever, at EUR 105 billion. SMEs’ own resources have reached a share of 53% of their investment funding, an increase of 4 percentage points.

International business appears to have emerged from the trough, posting a slight increase again for the first time in three years (+2.2% to EUR 546 billion). SMEs benefited from steadily improving conditions in Europe. Larger SMEs in particular exhibited much better international performance. In the short term the Brexit vote will have manageable impacts on SMEs. Despite achieving higher turnover on international markets, small and medium-sized enterprises’ direct international integration declined. At 628,000, the number of SMEs doing business outside Germany dropped by nearly 100,000 on the year 2014.

There is still a big question mark hanging over investments. "Hopes for a strong increase in investments in the SME sector have not been fulfilled. There will only be a minor boost in 2016 as well, because enterprises are still too cautious with their plans. But more investment is needed in order to stay the pace with the strong labour market and become more productive in the long term. Overall economic productivity is already four times higher than in the SME sector. That is a wide gap, and it is clearly the Achilles’ heel of SMEs", said Zeuner.