German SMEs Show Signs of Economic Recovery After Two-Year Decline

After two years of continuous economic contraction, the German medium-sized enterprises (Mittelstand) are experiencing a potential turnaround. Recent analysis from the Datev-Mittelstandsindex indicates a 2.8% increase in revenue for small and medium-sized enterprises (SMEs) in May compared to a significantly weak month the previous year. This marks the first indication that the downward trend may be reversing, with economic stabilization appearing on the horizon.

According to Datev economists, the improvement in the overall business climate--previously reflected in various company surveys--is now evident within the ranks of small and medium-sized businesses. Specifically, revenues for medium-sized companies increased by 6.4%, while small companies saw a 3.9% rise. However, micro-enterprises with fewer than ten employees have yet to recover, with their revenue remaining stagnant. Robert Mayr, the CEO of Datev eG, noted that the economic hurdles faced by these smaller entities are still significant.

Positive developments are evident across several key sectors, with agriculture, mining, financial services, and health and social care industries reportedly reaching a point of recovery. While the manufacturing sector and many service industries exhibit signs of stabilization, sectors like energy production and logistics have yet to demonstrate clear growth trends.

Regional disparities in recovery rates are notable, with some areas experiencing significant growth in SME revenues. For instance, districts such as Straubing and Frankfurt (Oder) reported increases of 10.6% and 7.1%, respectively. This growth is often attributed to new business establishments or expansions of larger companies. In contrast, regions like Emden are still grappling with challenges, facing a 14.1% decline in SME revenues, largely due to uncertainties surrounding the Volkswagen plant.

The Datev data provides unique insights as it leverages anonymized VAT returns from its clients, enabling a timely analysis of economic trends within the SME sector. This information contributes to an emerging narrative that the economy may have reached a low point and is poised for growth after two years of recessionary pressures. Earlier indications from business climate surveys have also shown improvement, with the Ifo business climate index reflecting a brighter outlook over the past five months.

Furthermore, the purchasing manager index for June suggests slight growth, with a composite index of 50.4 points, indicating a potential shift toward recovery. While the Datev-Mittelstandsindex underscores growing revenues, it also highlights rising wage pressures, with average pay increasing by 4.1%, outpacing overall inflation. This trend presents challenges for businesses, as they continue to reduce their workforce, with a reported 1.4% decrease in employment among SMEs compared to the previous year. Employment levels typically recover later in the economic cycle following a turnaround.