KfW SME Panel 2018 No sign of letting up: SMEs are on a path of growth in Germany and abroad

• Greatest turnover growth in six years
• SMEs’ importance for the labour market continues to grow
• Profitability stagnates for the first time in eight years
• International business is growing outside Europe
• Equity cushions reach new record high

Germany’s SMEs continue to grow at a high rate. Small and medium-sized enterprises have become even more important as employers. They have reached a new record employment level and have set their sights on the next one. Turnovers have grown at a rate not seen in years, and businesses continue to be highly optimistic, giving hope for continued high growth dynamic in the SME sector. These are the findings of the KfW SME Panel 2018 which was presented today.

With average turnover growth of 4.7%, small and medium-sized enterprises achieved the strongest increase in six years. Aggregate domestic turnover is currently at around EUR 4,150 billion, roughly EUR 190 billion above the previous year’s level. SMEs’ self-financing capacity has climbed to a new record, with the average equity ratio rising to 31.2% in 2017 (30.0% in 2016). SMEs are also optimistic about the coming years, as significantly more companies expect turnovers to rise (34%) than fall (16%) up to the year 2020.

At the end of 2017, SMEs employed 31.3 million workers, an increase of 418,000 or 1.3% on the previous year. SMEs will continue to drive the labour market in the future as well. This year 15% of SMEs want to increase their workforce and around 10% are planning cuts.

SMEs’ international business has gained strength again, as 21% of enterprises generated foreign turnover totalling EUR 577 billion (+EUR 30 billion). The share of international turnover in SMEs’ overall turnover was 28.6%. The increase was almost entirely generated by large SMEs with more than 50 full-time equivalent employees and by manufacturing firms and is attributable to a trend reversal in labour markets outside Europe. After turnovers had fallen there continuously since 2012, they grew from EUR 161 billion to EUR 186 billion in 2017. Business within Europe, by contrast, did not continue its growth trend of the past years and declined by EUR 2 billion to EUR 371 billion, with the European share in foreign turnover dropping from 68% to 64%.

Investments in the SME sector picked up again in 2017 and reached a total volume of EUR 211 billion (+3.4%). Most of the growth was in new assets and buildings, where investment reached a value of EUR 176 billion (+4%), the highest level since 2004. However, investments were distributed across fewer enterprises. Only 38% of SMEs invested (-4 percentage points) and the average amount invested increased by 14% to EUR 150,000.

Profitability in the SME sector fell slightly for the first time in 2017, with average profit margins dropping by 0.1 percentage points to now 7.2%. But given that profitability grew by 1.8 percentage points over the past 12 years, it remains on a good level.

Dr Jörg Zeuner, Chief Economist of KfW Group, warned against complacency amid high turnover growth and equity levels. “While the solid equity base of businesses is a sign of strength, it leaves behind a stale aftertaste, as investor numbers are falling. I would prefer it if more enterprises used a bigger portion of their profits to innovate, digitalise, develop new business models and use resources more efficiently. SMEs must reset their sights on achieving productivity through progress. Rising costs of wages and resources demand this if SMEs want to remain profitable.”

www.kfw.de/mittelstandspanel (available in German only)