KfW Research: German SMEs are facing considerable cost increases

• 80% of small and medium-sized enterprises anticipate more pressure this year
• Higher wages in particular are filtering through
• Businesses are responding by raising prices

The vast majority of SMEs in Germany (80%) expect their operations to face significant cost increases this year, according to a supplementary survey to the KfW SME Panel in April 2024. Businesses see the prices of energy, materials, commodities and inputs as the main cost drivers, as well as higher wages and salaries.

In the survey, 51% of businesses reported that their wage costs will increase, with 14% even predicting an increase of more than ten per cent. As wages and salaries account for one third of SMEs’ total costs (33%) on average, this variation represents the heaviest burden for enterprises.

With respect to expenditure on materials, commodities, inputs and ingredients – the second-highest cost factor for businesses – 56% expect cost increases this year, and 20% are preparing for increases in excess of ten per cent.

Although the situation in the energy markets has eased, the economy still faces headwinds from this end. This is because many small and medium-sized enterprises are locked into long-term contracts with energy suppliers and still benefited from comparatively favourable conditions in the past. But some of these contracts are now ending and will presumably be extended only at less favourable conditions. As a result, 64% of SMEs are preparing for rising energy costs, with 24% anticipating increases in excess of 10%.

But SMEs are responding to cost increases. More than one third (39%) of businesses that expect price increases in at least one cost category have raised the prices of their own products and services – by 11% on average. A further one third (33%) reported in April that they had not yet raised their prices but were planning to do so.

Furthermore, SMEs are busy reducing costs by improving their energy efficiency, for example by installing thermal insulation in buildings or purchasing energy-efficient equipment.

“The good news is that most SMEs report being able to absorb the higher cost burdens well. This shows how robust Germany's SMEs are”,

said Fritzi Köhler-Geib, Chief Economist of KfW. 48% of enterprises said they could cope with the higher costs in the long term, and a further 21% reported that the increased costs hardly had an effect on their finances, although 14% said that the financial burden from the considerable additional costs was too much to bear.

More information on the supplementary survey by KfW Research can be found at Focus on Economics | KfW

The analyses are based on a supplementary online survey of the KfW SME Panel. The KfW SME Panel (KfW-Mittelstandspanel) has been conducted since 2003 as a recurring survey of small and medium-sized enterprises with annual turnover of up to EUR 500 million. All enterprises that had already participated in an earlier wave of the KfW SME Panel and had provided a valid email address were surveyed. Responses from a total of 2,795 enterprises were evaluated (survey period: 15-25 April 2024). As the supplementary survey was linked to the main database of the KfW SME Panel, the results of the supplementary survey provide a representative picture.