The economic expansion of Spain, as indicated by major statistical metrics, has not benefitted small and medium-sized enterprises (SMEs), according to a recent report by Cepyme.

Presenting the latest edition of the 'Cepyme Indicator on the State of the SME', Cepyme president Gerardo Cuerva reported that operational costs for SMEs have surged by 24.5% over the past five years, while profitability remains 11.7% lower than pre-pandemic levels in late 2019.

During the press conference, Cuerva warned that Spanish SMEs have entered a "very dangerous spiral" characterized by rising costs, shrinking margins, low productivity, and declining profitability.

The report measures operational costs, encompassing labor costs, input costs, and services, which increased by just over 1.1% in the fourth quarter of 2024 compared to the same period the previous year, reflecting a similar pattern across different company sizes, including micro, small, and medium-sized enterprises.

Over the past five years, the operational costs of SMEs rose by 24.5%, with notable variations based on company size.

Medium-sized firms fared better with a comparatively smaller increase of 20.7% relative to pre-pandemic levels.

Meanwhile, small businesses saw operational costs rise by 25.6%, while micro-enterprises experienced a 25% increase.

Notably, micro-enterprises have recorded all-time high costs, as small and medium enterprises have generally seen some moderation in costs since mid-2022 across various quarters.

Labor costs specifically moderated to an annual increase of 3.6%, the slowest growth rate since June 2021. Nevertheless, the pace at which labor costs are rising remains significantly higher than the inflation rate, which is a stark contrast to the average increase of 0.3% observed in the decade preceding the pandemic.

The real increase in labor costs, adjusted for inflation, marked the highest level in the second half of 2024 since 2009, excluding the atypical first quarter of 2021 characterized by layoffs during the employment regulation period (ERTE).

The report highlights disparities based on company size with smaller firms experiencing higher labor cost increases in 11 of the last 15 quarters.

Over the last three years, labor costs surged by 25.1% in small businesses compared to 19% in medium-sized firms.

This ascension is largely attributed to significant increases in the minimum wage over recent years, which disproportionately affects smaller employers.

For instance, projected minimum wage rates for 2025 imply that this wage will equal 73.1% of the average salary of micro-enterprises and 69.2% for small companies, compared to 57.2% for medium-sized firms and 51.3% for large companies.

In terms of input costs, there was a slight 0.2% annual decrease in the fourth quarter of 2024, but those costs remain 34.9% higher than levels recorded at the end of 2019. Although energy prices saw a 1.1% decline, providing some relief to SMEs, they are still significantly inflated over the longer term—77.8% higher than five years ago.

Service-related costs for SMEs have continued to increase, rising by 1.7% year-on-year in the fourth quarter of 2024, marking seven consecutive quarters of growth.

When assessed against 2019 figures, service costs rose by 6.9%, with the declines in advertising costs (-7.5%) or limited rises in rental costs (1.3%) unable to compensate for sharp increases in postal services (18.6%), transportation (16.7%), and security services (12.5%).

On a more positive note, SMEs experienced a 5.4% increase in sales during the fourth quarter of 2024, the largest growth the sector has seen in seven quarters.

When accounting for price changes, the annualized sales growth stands at 4.6%, representing the best performance since September 2022. Both small and medium enterprises reported similar sales growth in comparison to the same quarter of the previous year; however, sales adjusted for price changes showed a more substantial increase of 13.9% for medium-sized firms compared to just 2.5% for small businesses.

On average, SMEs reported a 6.2% growth in sales over the past five years.

Despite the increase in sales, these figures have not mitigated the substantial rise in costs over the past five years.

Consequently, the gross profitability of Spanish SMEs is still 11.7% lower than at the end of 2019, even with an increase of 1.9% over the past year.

Small businesses experienced a 15.4% reduction in profitability over the last five years, albeit with a 2.1% increase in the last twelve months.

Medium-sized firms saw a smaller annual growth of 1.2%, coupled with a 10.4% decline in accumulated profitability over the same duration.

Productivity among SMEs grew by 0.4% in the last quarter of 2024 after seven consecutive quarters of year-on-year declines.

However, this improvement has not restored productivity to pre-pandemic levels, with declines of 2.6% for small firms and 7.4% for medium enterprises still evident when compared to figures from before the pandemic.

Cuerva reiterated concerns expressed to the Spanish government, emphasizing that there is no further margin to increase pressures on SMEs, highlighting a bleak outlook for 2025 in light of announced hikes, including the minimum wage and the Equity Intergenerational Mechanism (MEI).