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Swiss industry set for a turnaround

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The Swiss industrial sector saw its cautious expectations again disappointed. Yet although business continued to slump in the first quarter of 2002, the latest UBS survey reveals evidence that a recovery is on the way.

UBS Outlook, 2nd Quarter 2002

The results of UBS's March survey of companies in the industrial sector are exceptional in many respects. On the one hand, the business climate deteriorated further in the first quarter of this year, with the consolidation predicted at the time of the last poll three months ago failing to materialize. Yet the variations between individual sectors remain substantial. On the other hand, company prospects for the second quarter show signs of a marked change for the better. While none of the indicators, on balance, have actually moved back into positive territory yet, the difference between last quarter's actual performance and expectations for the current quarter is the most striking in the long history of UBS surveys. In the past, changes in corporate sentiment of far less substantial proportions have proved a highly reliable indicator of an upcoming turnaround, even if the trend reversal has often lagged three months behind. The results of the current survey therefore strongly suggest that industry will start to shake off the current slump by the middle of the year at the latest. The UBS business cycle indicator, which anticipates by two quarters the official figures for developments in Swiss GDP, also confirms that the downturn is over

Gloom in the first quarter
With the exceptions of work backlogs and retail prices, all the indicators surveyed were on balance down once again year-on-year in the first quarter of 2002. Only 17% of companies surveyed recorded an increase in orders received, with 53% posting a fall (giving a balance of -36%). Domestic orders (down 37% on balance) performed slightly worse than export orders (down 32%). Production volumes, sales and earnings were equally depressed, while headcount continued to fall. Taking the average for the industrial sector as a whole, plant capacity utilization stood at 82%, the lowest level since 1994. One
positive factor is that stocks of finished goods are declining at an accelerating pace, indicating that the process of adjusting capacities to the lower level of demand is largely complete. This suggests that once orders start to pick up, production will fairly quickly follow suit.

Wide-ranging recovery in sight
In view of this situation, the optimism of company managers regarding the prospects for the second quarter appears legitimate. Although on an industry average none of the indicators examined in the UBS survey are yet showing positive values, the forthcoming turnaround is clearly in sight, and all the sectors polled agree that it is on the way. The trend is being driven by a recovery in orders received, primarily from abroad, which should lead to a fairly rapid upturn in production and sales. Taking business activity as the sum of orders received, production and sales, the balance of negative reports is down from an effective 32% in Q1 to an expected 9% in Q2. As a result, the decline in earnings is also set to slow. No turnaround is seen so far regarding headcount, with a quarter of the firms polled reporting a continuing fall in staff numbers.

Sharp differences between sectors
Firms in the consumer-driven food manufacture sector were alone in reporting a positive performance for the first quarter, while five sectors (chemicals, paper and graphics, electrical engineering, plastics and textiles) already seem to have bottomed out. On the other hand, the picture in machinery and metals has become even more bleak, with both sectors showing symptoms of recession. Watch-making too has on balance fallen back still further. Nevertheless, all sectors except plastics are hoping orders will pick up significantly, with food, watch-making and chemicals even expecting to report a positive balance.

UBS business cycle indicator and Swiss GDP
(% change year-over-year)

The benchmark stands at 12% equities and 10% foreign currency, i.e. this investment group is suitable for pension funds with medium floating reserves.

Data (%)

The benchmark stands at 25.5% equities and 17.4% foreign currency, i.e. the BVG index 93 is replicated.

Sources: seco (GDP); UBS (survey and calculations)
*preliminary official data

Zurich / Basel, 10 April 2002
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Basel/Zurich, 10 April 2002