Finally, SMEs are seeing growth again – but 8 out of 10 entrepreneurs are pessimistic: The great paradox in German SMEs

A turning point after two years of crisis? What the new figures really mean for German SMEs

The German economy has been going through a difficult phase for several years. After two years of almost continuous decline, however, signs of stabilization are emerging for the first time, raising hopes for a sustainable economic turnaround in German SMEs. Current developments reveal a complex picture of initial positive signals and persistent structural challenges that continue to significantly burden the backbone of the German economy.

First signs of hope in the sales figures

The latest data from the DATEV SME Index shows a positive trend for May 2025 for the first time in two years. With a 2.8 percent increase in revenue compared to the very weak month of the previous year, small and medium-sized enterprises (SMEs) in Germany have reached a significant psychological turning point. This development is particularly noteworthy because SMEs had previously experienced almost continuous revenue declines for two years.

The positive trend is not uniform across all company sizes. Medium-sized companies saw the strongest recovery with a 6.4 percent increase in revenue, while small businesses achieved solid growth of 3.9 percent. Micro-enterprises, on the other hand, remain in a difficult situation with minimal growth of just 0.1 percent. This discrepancy illustrates that the economic recovery has not yet reached all sectors of the SME market, and that the smallest businesses in particular continue to struggle with significant problems.

Sectoral differences shape the picture

The recovery is being driven primarily by certain sectors of the economy. Trade, construction, and large parts of the service sector are already showing significant improvements and are contributing to the positive development in almost all federal states. The manufacturing sector is also showing signs of stabilization, after production increased by a remarkable 3.0 percent in March 2025 compared to the previous month. Particularly encouraging is the fact that the first quarter of 2025, with growth of 1.4 percent, recorded the strongest quarterly growth in three years.

Nevertheless, there are still problem areas in the German economy. The hospitality industry recorded another decline of 7.0 percent in May 2025 compared to the previous year, remaining the most problematic segment of German SMEs. This persistent weakness shows that the recovery is not yet broad enough to encompass all sectors of the economy.

Regional diversity of development

A regional analysis reveals significant differences in the economic development of small and medium-sized enterprises (SMEs). While some areas show strong revenue growth among SMEs, others continue to struggle with structural challenges. Districts such as Straubing, Frankfurt an der Oder, Bremerhaven, and Emsland have shown particularly outstanding development. In Straubing, SME revenues increased by an impressive 10.6 percent, and in Frankfurt an der Oder by 7.1 percent.

These regional developments are often influenced by the establishment or expansion of large companies. For example, small and medium-sized enterprises (SMEs) in Straubing benefited from the arrival of the service provider Amazon, demonstrating the importance of targeted investments for regional economic development. On the other hand, there are districts like Emden, where SMEs suffered a 14.1 percent drop in revenue, due in part to uncertainties surrounding the Volkswagen plant.

Ongoing structural challenges

Despite initial positive signs, German SMEs continue to face significant structural problems that threaten their competitiveness and future viability. A recent special survey conducted as part of the KfW SME Panel clearly shows where small and medium-sized enterprises see the key challenges for 2025.

Bureaucratic burden as an impediment to growth

Bureaucratic burdens top the list of problems plaguing German SMEs. Companies complain about increasing regulation and complex administrative procedures that tie up valuable resources. This is particularly serious in times of skilled labor shortages, as 69 percent of HR staff in small and medium-sized enterprises are now almost exclusively occupied with administrative work. This trend prevents companies from focusing on strategically important tasks such as digitalization, employee development, and recruitment.

Overregulation is particularly evident on construction sites, where, according to business owners, there are now more inspectors than tradespeople. This excessive level of oversight not only hinders efficiency but also leads to significant delays in construction projects and thus to additional costs for the companies.

The shortage of skilled workers is worsening

The shortage of skilled workers remains one of the most pressing challenges for German SMEs. Already, 58 percent of small and medium-sized enterprises expect difficulties filling vacancies within the next five years. The consequences are significant: fewer orders accepted, reduced production or opening hours, or even the closure of locations. Particularly alarming is the fact that 62 percent of the surveyed SMEs fear they will be unable to fill open apprenticeship positions in 2025.

Demographic change is putting increasing pressure on small and medium-sized enterprises (SMEs) and exacerbating the already strained labor market. At the same time, the ongoing decline in employment is leading to a significant decrease in the number of employees in small businesses. This vicious cycle of staff shortages and declining employment threatens the long-term stability of many SMEs.

Cost increases are putting a strain on companies

Besides higher energy costs, companies are particularly burdened by the recent increases in wages and social security contributions. These already account for 33 percent of total costs, with an average return on sales of only 7 percent. This development demonstrates how little leeway many medium-sized companies have to absorb further cost increases.

Interestingly, German SMEs have weathered the sharp price fluctuations in the energy markets caused by the war in Ukraine better than initially feared. According to a KfW study, 72 percent of medium-sized companies reduced their energy consumption through energy-conscious practices. This adaptability demonstrates the resilience of German SMEs, even though energy costs continue to represent a significant burden.

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Digitalization and sustainability as a future challenge

German SMEs face the enormous challenge of simultaneously undergoing digital transformation and operating more sustainably. A survey by the German Association for Materials Management, Purchasing and Logistics (BME) shows that 60 percent of small and medium-sized enterprises have already digitized their procurement processes, and another 30 percent plan to do so in the near future. Nevertheless, 71 percent of respondents see a further need for digitization in supplier management, indicating significant potential for increasing efficiency.

The challenge lies in the fact that many small and medium-sized enterprises (SMEs) admit they have not yet achieved a high degree of digitalization. Furthermore, digitalization and sustainability are rarely considered together. Reasons for this include a lack of financial resources or knowledge. These shortcomings could prove to be a significant competitive disadvantage in the medium term, as both digital and sustainable transformation are crucial for the future viability of these companies.

The financing situation remains relaxed

One positive aspect of the current situation for German SMEs is the relaxed financing situation. Contrary to many fears, recent studies show that 84 percent of the surveyed SMEs had no problems raising capital. This confirms that a lack of capital is currently not an obstacle to growth.

It is also noteworthy that more and more medium-sized companies are foregoing bank loans to finance their investments. The proportion of investing medium-sized companies that have resorted to bank loans has almost halved in the past 20 years. This development is less attributable to restrictions in the availability of credit than to a changed attitude towards debt and the high equity capital of many companies.

International competitiveness under pressure

Despite its traditional strengths, German SMEs are increasingly coming under pressure in international competition. High energy costs, stringent regulations, and comparatively high taxes and levies are hindering companies' growth potential. These disadvantages are further exacerbated by international competition, as other countries sometimes offer more favorable conditions.

At the same time, German SMEs continue to demonstrate their strong export performance. Around 97 percent of all exporters in Germany in 2023 were small and medium-sized enterprises (SMEs), generating export sales of €277 billion. Even though this figure was slightly lower than the previous year, it underscores the international orientation and competitiveness of German SMEs.

Pessimistic future expectations despite current recovery

Paradoxically, the first positive sales figures stand in stark contrast to the expectations of many business owners for the future. A survey by the German Association of Small and Medium-Sized Businesses paints a disturbingly bleak picture: eight out of ten medium-sized companies expect the German economy to contract rapidly by 2025. A good 58 percent of the surveyed medium-sized businesses anticipate an economic downturn, and one in five is even preparing for an economic depression.

This pessimistic view is supported by concrete experience: 40 percent of medium-sized companies recorded revenue losses in the past year, and just as many indicated that they intend to invest less in the coming year than before. This reluctance to invest could have a self-fulfilling effect on economic development and jeopardize the hoped-for turnaround.

Innovation and research as sources of hope

Despite all the challenges, German SMEs are proving to be pioneers of technological progress in many areas of cutting-edge research. The "SME Innovative" funding program of the Federal Ministry of Education and Research supports small and medium-sized enterprises in strengthening their innovative capacity. More than 2,700 ambitious research projects have already been funded as individual or collaborative projects, involving over 4,500 SMEs.

This innovative strength is crucial for the future viability of German SMEs. In 2022, a relatively high proportion of small and medium-sized manufacturing companies in Germany (around 4.3 percent) operated in the high-tech sector, significantly exceeding the EU average of 2.0 percent. This technological leadership in niche areas could be decisive in determining whether German SMEs can maintain their international competitiveness in the long term.

Regional strengths and the importance of targeted support

Regional differences in the landscape of small and medium-sized enterprises (SMEs) reveal both challenges and opportunities. While some regions have benefited from targeted investments and business relocations, others struggle with structural problems. This development underscores the importance of differentiated economic policy measures to support the respective business environment.

The KfW SME Atlas impressively documents the regional diversity of the SME landscape in Germany. For example, small and medium-sized enterprises (SMEs) from Rhineland-Palatinate achieved the largest increase in employment between 2012 and 2016, companies from Hamburg have the strongest international presence, while businesses from Berlin are significantly more locally rooted. This diversity is both a strength and a challenge, as it requires different approaches to promotion and support.

Between hope and realism

The current situation of German SMEs is best described as a turning point between hope and persistent concerns. The first positive sales figures after two years of decline are undoubtedly encouraging and show that SMEs still possess the fundamental capacity for recovery. At the same time, the structural challenges remain and require decisive action from both policymakers and businesses.

Forecasts for the German economy as a whole remain subdued. Both the EU Commission and the German Council of Economic Experts expect stagnation with zero percent growth in 2025. Only in 2026 is slight growth of around 1.0 to 1.1 percent expected. These macroeconomic conditions will influence and potentially hinder the recovery of small and medium-sized enterprises (SMEs).

Crucial for the future course of events will be whether the identified problem areas can be addressed. Reducing bureaucratic burdens, taking measures to combat the skills shortage, and supporting digital and sustainable transformation are of central importance. Only if these structural challenges are successfully overcome can the initial positive signs develop into a lasting turnaround.

The strength of Germany's small and medium-sized enterprises (SMEs) lies in its diversity, its innovative capacity, and its regional roots. These qualities have carried it through difficult times in the past and will continue to be crucial for its success. Current developments show that the hope for a turnaround is certainly justified, even if the path to achieving it is still fraught with considerable obstacles.

German SMEs are thus facing a crucial phase: The first signs of hope are emerging, but whether this will lead to a sustainable recovery depends on their ability to solve structural problems and seize the opportunities presented by digitalization and sustainability. The coming months will reveal whether the hopes after two difficult years are justified, or whether further efforts are needed to strengthen the backbone of the German economy.

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