German SMEs Caught Between Rising Wage Bills and Falling Confidence

The mood across Germany’s Mittelstand remains bleak, even as sales figures showed a modest uptick in June. Businesses are cutting jobs and shelving investment plans, with labour costs emerging as the biggest strain on already tight margins.

Data from the DATEV Mittelstand Index paints a contradictory picture. Seasonally and calendar-adjusted revenues rose 2.7 percent in June compared with the same month last year—a reversal from May’s 1.2 percent decline. But DATEV management cautioned against reading too much into the number, describing it as a temporary stabilisation rather than the start of a broad recovery.

Mid-Sized Firms Post Revenue Gains While Shedding Staff

The disconnect is sharpest among mid-sized companies. They boosted turnover by 7.1 percent year-on-year, yet cut their headcount by 0.6 percent. Micro-enterprises went the other way: revenues fell 2.9 percent while employment edged up 0.7 percent. Across all segments, total employment slipped 0.1 percent in June.

A separate CFO survey underlines the caution. Forty-five percent of finance chiefs said their business outlook had worsened compared with three months earlier. Weak domestic demand and geopolitical uncertainty were cited as the main drags. As a result, 72 percent of respondents said cost reduction was their top priority. The survey’s employment index dropped sharply—by 17 percent.

Craft businesses are also feeling the pinch. In the Frankfurt Rhine-Main chamber district, the business climate index fell to 131.7 points in the second quarter, down from 139 points a year earlier. Only 64 percent of firms are still investing at stable levels, and 40 percent plan further cuts to their investment budgets. The current interest rate environment is seen as a major obstacle.

Wage Costs Surge as Craft Sector Calls for Action

Labour costs have become the central headache. The Mittelstand wage index jumped 6.3 percent in June, with construction recording the steepest increase at 7.8 percent. Handwerkspräsident Dittrich noted that the craft sector had already lost around 73,000 jobs in 2025. He is calling for a commission to tackle the rising cost of non-wage labour expenses.

There is no sign of a turnaround in inflation-adjusted revenue trends for craft businesses. Insolvencies are rising, particularly in structural engineering.

Skills Shortage Persists Despite Job Cuts

A paradox is emerging: even as some areas shed workers, the shortage of qualified staff remains a structural bottleneck. According to an industry report, 72 percent of industrial manufacturers cannot find suitable talent. Meanwhile, internal upskilling has stalled—60 percent of employees have received no targeted skills training in the past six months. Forty-five percent of those surveyed fear they could be replaced by artificial intelligence within two years.

One bright spot is the Aktivrente, or active pension, scheme. Since the start of the year, it has allowed pensioners to earn tax-free supplementary income. DATEV data shows a steady rise in the number of full pensioners working in SMEs. The Federal Finance Ministry estimates around 168,000 people are now using the scheme.

Insolvencies Hit Two-Decade High

The prolonged economic weakness is leaving deep scars. According to the Halle Institute for Economic Research (IWH), corporate insolvencies in June were 80 percent above the average for the years 2016 to 2019—the highest level in two decades. Experts view this not as a normal market shakeout but as evidence of a deep structural malaise. On a more positive note, new business start-ups rose 10 percent in the first quarter compared with the same period last year.

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