Although the German economy was virtually stagnant, the profitability of non-financial corporations improved in 2023, with their pre-tax profit margin rising significantly to 5.3 % from 4.2 % in the previous year. This was mainly due to lower materials costs: in terms of volume, the fall in the prices for energy and intermediate inputs was greater than the rise in personnel expenses and interest costs. This was particularly true for energy companies, which benefited considerably from lower energy prices. On the income side, revenues rose only slightly in an environment of continued high inflation. Interest income and income from other long-term equity investments were the major contributors to profit margins, with the latter factor playing a particularly important role in transport equipment. Yet even without the one-off developments in the energy company and transport equipment sectors, the profit margin of non-financial enterprises remained high. With regard to their profitability, German enterprises seem to have coped well with the stagnation of economic activity in 2023. 

Starting from a low level, corporate insolvencies rose sharply in 2023, mainly owing to the poor economic situation, catch-up and normalisation effects following the pandemic, and higher financing costs. Contact-intensive areas such as retail and the hotel and restaurant sector were particularly hard hit, as were sectors that tend to be more sensitive to interest rates, such as construction and real estate. The ICT sector and business-related services, which experienced exceptionally high demand during the pandemic, also contributed significantly to the increase. 

In 2023, monetary policy tightening also pushed up the average interest rate on bank loans to non-financial corporations in Germany. Estimates using firm-level data from the Bundesbank show that contractionary monetary policy shocks already tend to dampen investment by non-financial corporations in Germany in the same year. The strongest impact is estimated to occur after about two years. Consistent with this, the interest rate reversal had left only moderate traces in enterprises’ financial statements by the end of 2023. 

Despite the weak state of the economy, enterprises remained well positioned in 2023 in terms of their liquidity and stability. The equity ratio rose again in 2023, having fallen over the previous three years, but remains below its pre-pandemic level. Enterprises’ liquidity positions also remained favourable in 2023 and liquidity needs trended lower. The good profitability, solvency and liquidity position of enterprises in the non-financial corporate sector as a whole largely reflects developments across sectors.

The ongoing economic weakness is likely to continue to weigh on enterprises’ business activity and thus their sales growth in 2024. At the same time, the pressure on costs is expected to remain high due to persistently high financing and energy costs, as well as the sharp rise in wages. Cost factors are placing a particular strain on the competitive position of the industrial sector. On balance, this is likely to have a negative impact on profitability in some parts of the corporate sector in 2024. 

The German economy stagnated in 2023, while the tightening of monetary policy increased financing costs. Real GDP declined by a seasonally-adjusted 0.1 % compared to the previous year, due partly to the structural growth problems of the German economy and partly to weak domestic and foreign demand. Production remained well below medium-term aggregate production capacities. The rise in interest rates and high construction costs dampened investment demand. Gross fixed capital formation, especially in construction, fell. Private consumption also weakened after being a major driver of the economy in the two previous years. High inflation per se depressed real incomes and consumers’ willingness to spend. Exports virtually stagnated in the face of weak global demand and a less favourable competitive environment, due in part to the appreciation of the euro. On the production side, the significant decline in the prices of imported intermediate inputs and commodities, especially in the energy sector, eased pressure on the cost structure in industry. Nevertheless, input prices remained above 2021 levels. The stable labour market helped employees to largely achieve their demands for real wage adjustments, increasing enterprises’ personnel expenses. On the whole, therefore, the business environment remained difficult despite the fall in energy prices compared to the previous year.

Based on the annual financial statements available to date, pre-tax profit margins rose in 2023, from 4.2 % in the previous year to 5.3 %. 1  This was only just below the record figure from 2007. This positive development was due both to cost-side relief and to favourable developments on the income side. Material costs fell significantly due to the decline in prices of intermediate inputs, especially of energy. Despite a slight increase in interest costs, total costs fell significantly because lower material costs more than offset the higher personnel expenses. On the income side, revenues increased slightly. In view of the continuing strong increases in selling prices, the price-adjusted revenues of enterprises are likely to have fallen, however. Nevertheless, interest income and income from other long-term equity investments contributed to an improvement in the earnings of enterprises compared to the previous year. 

Developments in the automotive industry and amongst energy companies contributed to the increase in gross profit margins across the corporate sector. In contrast to 2022 and most likely also 2024, car sales were comparatively brisk in 2023. 2 In addition, the automotive industry realised significant income from participating interests, mainly from abroad, possibly with the aim of smoothing fluctuations in profit in view of the annual financial statements. After recording some major losses in the previous year, energy companies reported their highest annual profits since records began in 1997, boosted by significantly lower material costs. The fact that sales declined less in comparison could indicate that price reductions on the purchasing side were not fully passed on to end customers. This would have significantly increased profit margins. 3 Without the contribution of these two sectors, the gross profit margin would have increased by only 0.2 percentage point in 2023. 4 But the gross profit margin in 2023 was high in a long-term comparison even without the contribution of these two sectors. With regard to their profitability, German enterprises seem to have coped well with the stagnation of economic activity in 2023.

Corporate insolvencies rose sharply in 2023 year on year. The increase is due to the weak economic environment as well as to catch-up and normalisation effects in the wake of the pandemic. This applies in particular to the contact-intensive sectors of retail and the hotel and restaurant sector, which accounted for almost a third of the increase in corporate insolvencies in 2023. While economic activity in these sectors declined, in some cases significantly, during the coronavirus pandemic, corporate insolvencies in these industries fell sharply. The main factors in this were probably the suspension of the obligation to file for insolvency and extensive government support measures. 5 Despite this development, the share of persistently unprofitable enterprises in Germany did not increase during the pandemic (see the supplementary information entitled “Zombie firms in Germany during the COVID-19 pandemic”). Furthermore, by 2023, demand in sectors that had benefited from extremely strong demand during the pandemic is likely to have normalised. This is particularly true of information and communication services and business services, which together contributed slightly over one-fifth of the increase in corporate insolvencies in 2023. Moreover, the rise in corporate insolvencies can be partly attributed to the interest rate reversal in the summer of 2022. Evidence for this can be seen in the sharp increase in insolvencies in interest rate-sensitive segments such as construction, real estate and other real estate-related sectors. Together, they accounted for a little over a quarter of the increase in corporate insolvencies. The manufacturing sector, in contrast, contributed comparatively little.

In the first half of 2024, corporate insolvencies continued to rise sharply compared with the same period a year earlier. Extrapolated to the year, corporate insolvencies are expected to exceed pre-pandemic levels again in 2024 for the first time. Higher financing costs as well as catch-up and normalisation effects in the wake of the pandemic are having an impact this year, too. The fact that the German economy has not yet regained momentum is probably playing a certain role in the continued sharp rise in insolvencies.

The interest rate reversal in the euro area increased financing costs for German enterprises in 2023. This trend increased the cost of external financing for enterprises and raised debt servicing costs for new liabilities. In principle, this limits the scope for investment. The impact this has ultimately depends on the debt structure and the ability of enterprises to service interest costs or switch to other sources of financing. In addition to the impact on cash flow, an interest rate hike tends to dampen corporate investment by reducing the profitability of investment projects and making alternative investments more attractive, while falling asset prices also lower the collateral base for loans.

Estimates using Bundesbank firm-level data can provide insights into how the interest rate increases affected investment by German firms in the 2023 reporting year. The study is based on extensive firm-level data by the Bundesbank since the 1970s, making it possible to analyse the effects of interest rate cycles over several decades. 6 The local projections method is used to estimate the impact of monetary policy shocks on the investment ratio. 7  The results show that, in the past, contractionary monetary policy shocks significantly dampened investment by non-financial corporations in Germany. For example, in the past an unexpected interest rate increase of 100 basis points reduced the investment ratio of German enterprises by 0.6 percentage point within two years. The effect could generally be seen in the year of the interest rate change and then intensified in subsequent years, before gradually subsiding after four years. 

According to a rough calculation based on the estimated results, the latest interest rate hikes totalling 400 basis points between July 2022 and the end of 2023 may have reduced the investment ratio in the corporate sector by up to 2.4 percentage points. 8 This assumes that these interest rate hikes were completely unexpected – which is unlikely to have been the case. Nevertheless, the estimates show that monetary policy tightening is likely to have a significant adverse effect on investment by the German corporate sector.

The results show that interest rate increases had a greater impact on the investment ratio than interest rate cuts. Looking at interest rate hikes separately from interest rate cuts in the estimates, an unexpected interest rate increase of, say, 100 basis points reduced German firms' investment ratio by around 1.3 percentage points on average after one year, 9 while an interest rate cut of the same size only increased the investment ratio by 0.7 percentage point in the short term. 10 This asymmetrical effect is presumably due to the fact that in some cases, higher interest rates can have the same effect as tighter credit restrictions for enterprises with weaker finances. One indicator of an enterprise's financial situation could be its equity base. This is because, according to the estimates, companies with a low equity ratio react more strongly to monetary policy shocks, while financially sounder companies are more resilient. 11 Additional analyses suggest that the asymmetrical effect has diminished over time, possibly because of the significant improvement in the capital base in the corporate sector over the last two decades. This may have reduced sensitivity to interest rate increases.

The interest rate reversal left only moderate traces in the annual financial statements available up to the end of 2023. Changes in interest rates are most likely to be reflected in companies’ interest expenses and income, as well as in their liabilities. Accordingly, interest expenses did increase. The imputed interest rate, which is a measure of enterprises’ actual financing costs, was only 3.6 %, placing it above the previous year’s rate, but still below the level before 2016, with the exception of a one-off increase to 4.1 % in 2018. One reason for the comparatively moderate increase could be the slight rise in the discount rate for pension provisions, which reduced interest expenses somewhat. In previous years, the continuous decline of this rate, which is calculated as an average over the past ten years, had driven up expenses. In addition, many companies appear to have taken measures to limit their interest costs. For example, companies have scaled back long-term interest-bearing bank debt and are increasingly using customer advance payments as a source of financing. Companies also favoured financing with their own funds over using external funds. 

In nominal terms, the investment ratio and the gross and net additions to tangible fixed assets continued to rise. This is also true for investments in subcategories such as land and buildings, technical equipment and machinery, and furniture and equipment. However, price effects in particular are likely to play a role here. According to the national accounts, gross fixed capital formation in the economy as a whole and investment in machinery and equipment fell after adjustment for inflation. Moreover, the effects of the interest rate reversal are not expected to be fully felt until two years after the interest rate hike, i.e. in the financial years 2024 and 2025, based on the estimates. It should be noted that interest rates on bank loans to non-financial corporations have fallen slightly again in 2024, which in itself is likely to mitigate the financial burden on companies somewhat.

Unsurprisingly, given the challenging economic environment, the performance of non-financial corporations was weak in 2023. Sales in the non-financial corporate sector increased only slightly. The sales trend varied greatly by sector. For example, sales grew strongly in the hotel and restaurant sector (probably due in part to certain pandemic-related catch-up effects), among business service providers, in the motor vehicle trade, construction, manufacture of transport equipment and mechanical engineering. By contrast, energy-intensive industrial sectors such as the wood, paper and printing industry, the chemical and pharmaceutical industry and energy supply saw sales decline. 12 The decrease in sales in the energy-intensive manufacturing sector is probably also related to the fact that energy prices, although falling, were still high. For example, this could have led to parts of production being moved abroad or to a decline in shares of exports due to reduced competitiveness. Lower energy prices led to an immediate decline in sales in the energy supply business. The rise in sales in some parts of the services sector is thought to be mainly due to price effects given the environment of persistently high inflation. By contrast, interest income continued to grow strongly across all sectors as a result of the interest rate reversal. Income from other long-term equity investments rose significantly off the back of developments in the transport equipment and chemical and pharmaceutical industries.

Despite the generally weak performance, corporate profits rose sharply. This was mainly due to the fact that expenses were lower on average. This was because the cost of materials declined, partly as a result of falling prices for intermediate goods, especially energy. However, the drop in the cost of materials was limited to energy supply, energy-intensive manufacturing, and the transportation and storage sector. In the remaining economic sectors, costs merely increased less than in the previous year. In sectors with high sales growth, the cost of materials increased correspondingly. There were further sharp increases (in most sectors) in personnel expenses due to significant wage increases and in interest expenses due to the interest rate reversal. One exception to this is the chemical and pharmaceutical industry, where both cost items fell. 13

From a sectoral perspective, too, profitability remained robust in 2023. Despite falling sales, the profitability of energy-intensive manufacturing industries declined only slightly because of reduced costs. Although gross profit margins fell in the wood, paper and printing industries, for example, they were still above the historical average. In the other energy-intensive industrial sectors, profitability remained close to the long-term average. Across all sectors, the highest increases in gross profit margin were recorded by the manufacture of transport equipment, energy supply and electrical engineering. The sectors in which the increase in profitability was primarily due to growth in income rather than reduced pressure on expenses included – in addition to transport equipment and the rest of the manufacturing sector – the information and communication sector, the mechanical engineering sector and the construction sector 14 .

The growth in corporate assets weakened in 2023 in view of the more subdued economic situation. Growth in non-financial corporations' total assets was much lower on average than in the two previous years. Enterprises used the additional funds largely for the formation of non-financial assets, while the acquisition of financial assets was weak. The share of financial assets thus decreased, as in the previous year, due mainly to the decline in total receivables. While long-term receivables continued to rise, short-term receivables, which account for a much larger share of the balance sheet, decreased. By contrast, other long-term equity investments rose sharply, as in the two previous years. In 2023, efforts to conserve liquidity were no longer a major factor for most enterprises, as liquid funds in the form of cash and bank deposits were reduced. The liquidity needs of most sectors changed only slightly. The strong increase in non-financial assets in large parts of the corporate sector was due in roughly equal measure to tangible fixed assets and inventories. The increase in tangible fixed assets was higher than in the previous year, while intangible fixed assets barely increased. However, it is not immediately obvious from corporate financial statements that many enterprises are looking into the use of artificial intelligence. This is easier to identify using more granular datasets (see the supplementary information on “The adoption and objectives of artificial intelligence in German firms”). However, the increase in inventories was not as high as in the previous year, partly due to muted price developments and stagnating sales. Moreover, supply chain disruptions were resolved in 2023, which reduced the need for increased inventory.

The capital base of enterprises improved on average in 2023. On the revenue side, most of the additional corporate funds were sourced internally, with a significant share coming from retained earnings. In contrast to equity, liabilities and provisions increased only slightly. The noticeable increase in the equity ratio thus roughly offset the decline from the previous year. The equity ratio rose in almost all sectors.

Liabilities shifted proportionately from long-term to short-term on balance, as in the two previous years. Short-term liabilities rose only slightly on average in 2023. Although advance payments received on account of orders and short-term liabilities to banks increased sharply, the reduction in trade payables and other liabilities had an offsetting effect. At the same time, enterprises reduced their long-term liabilities by decreasing their long-term liabilities to banks. 15 In contrast to the three previous years, provisions also increased only slightly. The rising discount rate resulting from the interest rate reversal may also have provided relief with respect to pension provisions.

Despite the weak development of the economy and higher financing costs, non-financial corporations performed well in 2023 in terms of their earnings and financing conditions. Energy-intensive enterprises continued to be negatively affected, probably in connection with the rise in energy prices, which worsened their competitive position. However, the corporate sector as a whole was able to increase its profitability compared to the previous year despite higher interest and personnel expenses. The fact that enterprises are offsetting lost revenue with cost savings also played a role, as sales growth was weak in 2023, and inflation remained high. 

Stability metrics also improved. In addition to the gross profit margin and the capital base, enterprises’ liquidity levels was also very good and long-term liabilities continued to fall. 

2024 will be another challenging year for enterprises. The ongoing economic weakness is likely to weigh on enterprises’ business activity and thus their sales growth in 2024. At the same time, the pressure on costs is expected to remain high due to persistently high financing and energy costs, as well as the sharp rise in wages. These pressures can also be seen in the increased number of corporate insolvencies, which are expected to exceed pre-pandemic levels again for the first time in 2024. On the one hand, cyclical stress factors are creating headwinds for enterprises. On the other, German firms are facing structural challenges posed by a shortage of skilled workers due to demographic factors, the green and digital transition of the economy, and the changed global economic environment. On balance, this is likely to weigh on profitability in some parts of the corporate sector, such as the manufacturing industry, and dampen profitability in the corporate sector as a whole in 2024.

Long series of extrapolated results of the corporate financial statement statistics are available online at www.bundesbank.de.

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