KfW SME Panel 2023 – small and medium-sized enterprises are also defying the next crisis

• Turnover in the SME sector rose by 16%, investment was up 15% – a notable rise, even adjusted for prices
• Equity structure is solid, but profitability is falling
• Economic headwinds increase strain in 2023

Germany’s SMEs are generally in robust shape even in times of crisis, according to the 2023 KfW SME Panel. The representative survey conducted by KfW Research revealed that the 3.8 million small and medium-sized enterprises in Germany achieved higher turnover and invested more in 2022 while moderately increasing their workforce. The average equity base of SMEs remains steady and their debt sustainability unchallenged. However, SMEs’ profit margins recently dropped to the lowest level since 2015. Small businesses in particular often appear to be hampered by increased costs.

“Since 2020, overlapping crises have put the resilience of Germany’s SMEs through a gruelling test. Nonetheless, despite all the stress factors such as the war in Ukraine, the energy crisis and rising prices, the bruises sustained by small and medium-sized enterprises have remained manageable even in 2022”

, said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

“This year, however, economic headwinds are putting increased strain on businesses. They are now rather sceptical about their business prospects. And even though the credit channel remains open, it is becoming more difficult for them to negotiate loans.”

In 2022, SME turnover rose by a good 16% in nominal terms (+ EUR 742 billion) to EUR 5,322 billion. This increase was not driven exclusively by inflation, as turnover grew by a strong 10% in real terms as well. Still, increased costs of materials, wages and energy exceeded the turnover growth for a number of enterprises. Profit margin fell from 7.4% to 7.0%. The profitability of micro-businesses with fewer than five employees in particular decreased significantly (from 13.8% to 11.8%). These companies are also much more likely to experience liquidity problems as a result. Lower returns are making it difficult for them to replenish liquidity reserves that were already under pressure from the COVID-19 crisis. Nonetheless, the liquidity situation across the overall SME sector remains comfortable. In the spring of 2023, almost six in ten SMEs described their liquidity situation as very good or good. A further 30% described it as still satisfactory.

Fears that SMEs might need to realign investments due to the crisis remained unfounded. Catch-up effects from the pandemic in the first half of 2022, pull-forward effects generated by deteriorating financing conditions and increasing prices of capital goods along with adjustments to mitigate energy cost increases provided a boost for SMEs’ investment activity. New capital expenditure by SMEs increased by 15% in nominal terms to EUR 211 billion. And even after accounting for increased price levels, it was still around 4% higher (+ EUR 190 billion) despite the challenges in the past year. What is more, small and medium-sized enterprises increased their investment activity at a higher rate than the entire corporate sector in Germany (by 10% in nominal terms).

The number of investors increased along with investment volume, as 43% or 1.63 million small and medium-sized enterprises invested in their operations (+5 percentage points or +183,000 companies). There is a clear link between company size and investment activity. Almost 90% of large SMEs with more than 50 employees invested last year, with average amounts exceeding EUR 1 million. A little over one third of micro-businesses with fewer than five employees actively invested in their activities, with amounts averaging just under EUR 60,000.

"Despite the difficult economic environment, SMEs considerably expanded their investment activity in the past year, showing themselves to be a cornerstone of all economic activity. More than four in ten euros invested came from a small or medium-sized enterprise in 2022”

, summarised Köhler-Geib.

“Investment activity in manufacturing also developed more positively than many had expected.”

But SMEs are sceptical about the current year and clearly feel the economic headwinds. Their mood has worsened since the start of the year. The weak economic growth outlook is also reflected in their expectations around turnover development this year. Almost one third of SMEs expect turnover to decrease in 2023, on average predicting a drop of 24%. SMEs’ investment activity is also pointing downward. In autumn of this year, 37% of all businesses surveyed reported having postponed or reduced the investments planned at the beginning of the year. Thirteen per cent abandoned their investment plans.

Overview of other important findings of the KfW SME Panel:

• SMEs created employment again in 2022, although the increase of 20,000 jobs was moderate. The lion’s share of overall economic employment growth took place among large enterprises and public-sector employers. A similar pattern could emerge this year. Employment is expected to grow across the overall economy in 2023, although employment expectations are rather trending downward among SMEs.

• The capital structure of small and medium-sized enterprises is strong. The average equity ratio fell by only 0.2 percentage points to 31.2%. SMEs again experienced structural improvements in their capital structure. The share of SMEs with a relatively high equity ratio of at least 30% increased by nearly one percentage point to just under 51%. At the same time, the share of businesses with a low equity ratio of less than 10% fell sharply to 25%.

• In the year of the interest rate turnaround, credit financing in the SME sector still experienced a boom. In order to (partly) finance their investments, 763,000 businesses used bank loans – more than in almost 15 years. In doing so, companies still largely benefited from easy access to credit. The rate of loan denials fell to an all-time low of 9% in 2022. For 2023, however, a trend reversal is foreseeable. Although the credit channel remains open, access to credit finance has become much more difficult, with high interest rates in particular making things hard for SMEs.

• Despite high borrowing levels in 2022, debt sustainability in the SME sector remains solid. The share of companies with critical debt sustainability ratios (‘zombie enterprises’) stood at a very low 3% in 2022.

The current KfW SME Panel by KfW Research can be found at: www.kfw.de/mittelstandspanel

The dataset:

The KfW SME Panel (KfW-Mittelstandspanel) has been conducted by KfW Research since 2003 and provides a representative dataset of small and medium-sized enterprises in Germany. It is the only representative survey of the entire German SME sector, from solo entrepreneurs to large SMEs, making it the most important source of data on issues relevant to the SME sector. The basic population of the KfW SME Panel includes all private-sector companies from all industries with annual turnovers of up to EUR 500 million. A total of 11,328 SMEs took part in the most recent wave. The main survey of the 21st wave was conducted in the period from 6 February 2023 to 16 June 2023. An additional – equally representative – special survey to the KfW SME Panel 2023 on the current business situation was carried out in September 2023 (with 2,718 responses).