German SMEs between the need for investment and the desire for financial resilience

• KfW Research: New investment by SMEs is down almost EUR 40 billion in 2020
• But digitalisation and climate action require greater investment efforts
• Both have high relevance for productivity and competitiveness

The coronavirus crisis has had a deep impact on the German economy, thwarting the investment plans of countless businesses this year. Corporate investment will presumably fall to around 12% of gross domestic product in 2020, a similarly low level as in the financial crisis. KfW Research estimates that almost EUR 40 billion in new investment will probably be lost in SMEs alone. The investment upswing in the SME sector that has lasted for six years now is thus coming to an abrupt end. Whether there will be a quick catch-up effect is questionable, given the experience which the top managers of many businesses have had with the crisis. Rather, their desire for greater stability and building greater financial resilience could lead them to withhold essential investment in the future, for instance in digitalisation and climate action measures. That would not bode well for the productivity and competitiveness of German enterprises.

The coronavirus crisis has caused many businesses to suffer high turnover losses. In addition, there is great uncertainty about the further progression of the crisis. Both factors are making it difficult for businesses to make the investments necessary to tap into growth areas emerging from the transition to a digital and climate-neutral economy. To be sure, the structural transition towards a digital knowledge economy is advancing, and digitalisation in the SME sector has also received a boost of late. Internationally, however, German businesses are only in mid-range and taking only small steps towards digitalisation. At the same time, the transition towards climate neutrality represents a great challenge and opportunity. After all, the high capital expenditure required could not just enable successful climate action but also develop the export market for climate technologies further.

"What we need is a digital and green investment surge. And now is the time for economic policymakers to create the framework, provide incentives for investment and lead the way with start-up finance in order to make future growth possible in the two key areas of digitalisation and climate action", said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “There are many starting points from which to attenuate the target conflict between financial resilience and capital expenditure in which many businesses find themselves. These include reducing the uncertainty for providers of capital, for example through a reliable signal for rising CO2 prices, addressing constraints such as skills shortages, and lowering financing costs. We face major challenges, but this is precisely the right time to chart the course forward to come out of the crisis stronger. We must think beyond the coronavirus crisis in order to secure lasting growth and prosperity in Germany."

Further information:

The current analysis by KfW Research entitled “SMEs between financial resilience and a digital and green investment rally – A target conflict that should not be" is available at www.kfw.de/fokus.