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UBS SME barometer 2nd quarter 2007 - Economy loses some steam in SME segment

Zurich / Basel | | Media Releases Switzerland

Swiss SMEs continue to assess economic developments in a very positive light. This is evidenced by the latest UBS SME barometer, which surveyed 500 companies in March. However, the results point to a slight growth slowdown in the first quarter of 2007. In addition, the driving forces of the economy will increasingly shift toward domestic-oriented businesses in the services sector in the second quarter.

In line with the overall economic trend in Switzerland, growth for small and medium-sized enterprises (SMEs) has traversed its peak. The business climate for these firms was slightly more muted in the first quarter of 2007 but continues to trend clearly in positive territory. This results from the UBS survey of March 2007 among roughly 500 businesses with fewer than 250 employees, carried out in conjunction with the Swiss Industry and Trade Association. The assessment of survey participants indicates that the business climate will not cool down any further between April and June, but rather consolidate at a high level.

Slowing growth in the first quarter of 2007
According to the UBS survey, the upswing in the SME segment lost steam in the first quarter of this year. However, growth weakness turned out to be less pronounced than had been expected in January. Order intakes, revenues and earnings indicators showed lower readings, on balance, than in the fourth quarter of 2006, but remained clearly at positive levels. While growth in domestic demand stayed nearly steady, momentum in foreign demand diminished noticeably. Overall, almost six out of ten survey participants reported higher order intakes and revenues year-over-year. Only one in eight companies suffered a decline in order intakes, and just one in fifteen a drop in revenues. SMEs operating in the services sector reported practically no weakness in the business climate. Hence, the apparent slowdown in growth is attributable entirely to the manufacturing sector. The ongoing trend toward rising sales prices recorded since the beginning of 2006 continued unimpeded: 35% of the SMEs surveyed realized higher sales prices, with just 14% recording a drop in figures. Thus, the overall earnings situation improved at a net 19% of the companies. High order backlogs led to a further build-up in the workforce. As of end-March, the level of employment had surpassed the previous year's mark at 24% of the surveyed companies on balance. Consequently, recruitment shifted increasingly from the manufacturing to the services SME sector.

Consolidation at a high level in the second quarter
The balance of reported order intake and order backlog figures continue to tread water at a very high level, which points to intact growth prospects for the second quarter. Furthermore, according to the expectations of the SMEs surveyed, the economy will not slow down any further in the second quarter, but rather consolidate at a high level. At the same time, the growth drivers continue to shift from the export-oriented manufacturing sector to domestic-oriented SMEs in the services sector. The high order backlogs reveal that there is still a time lag between the robust trend in demand and the sluggish adjustment in production capacities, leading to a demand overhang. So besides SMEs in the manufacturing sector, firms operating in the services sector in particular will increasingly find themselves in a position where they can implement higher sales prices. Nevertheless, the earnings situation for SMEs in the manufacturing as well as in the services sector will only improve to a modest degree, since rising costs of goods and services purchased as well as personnel costs will squeeze profits. On balance, 22% of SMEs in the manufacturing and services sector together plan to further expand their workforce by the end of June 2007.

Better access to credit
The robust economic trend has prompted companies to boost investments, which is also manifested in growing demand for borrowing. Since the beginning of 2006, growth in corporate loans accelerated noticeably, surging to 4.1% in the fourth quarter of last year - a rate not reached since 1999. The stronger growth in borrowing is attributable not just to large corporations, but also to SMEs: according to the UBS survey, more than 30% of the firms surveyed reported easier access to credit than one year ago, while merely 6% conveyed the view that access to credit had become more difficult.

UBS SME barometer

Notes: black bars = realized figures for the previous quarters; shaded bars = expectations for the current quarter; balance of the "gains" and "losses" reported (year-on-year) according to UBS survey: business climate = average of the balance of new orders and sales reported

The methodology used in determining the UBS SME barometer
The UBS SME barometer is based on an evaluation of the UBS survey on manufacturing that has been carried out by the Bank since 1975 and which was extended from the third quarter of 2006 to include service providers. Around 700 companies (500 SMEs and 200 large companies), which form a representative cross-section of the Swiss economy, are surveyed every quarter. Any companies employing less than 250 people are classed as SMEs. The barometer reports the balances of the current and expected business climate, employment, sales prices and earnings of SMEs as a whole. These indicators are reported as weighted averages of the performance of each sector (manufacturing/services), with the weighting being based on contributions to value added in the overall economy by these sectors in 2005. The responses obtained from our survey are evaluated using a diffusion index: the balance for each indicator represents the difference between the percentages of companies reporting a positive or negative trend. It does not therefore represent a percentage rate of change. A comparison indicator has also been developed so that the barometer does not only provide information on the economic health of SMEs over the course of time, but is also able to allow a comparison to be made with large companies. It is defined as the balance of the SME business climate less the balance for large companies. Irrespective of the absolute economic situation, a rise indicates a relative improvement of SMEs in comparison with large companies, while a decline indicates the reverse.

Appendix: UBS SME barometer in figures

Contacts:

UBS AG

Dr. Daniel Kalt

Head of Economic & Swiss Research

Tel. +41-44-234 25 60

Hans-Peter Hausheer

Economic & Swiss Research

Tel. +41-44-234 67 32

Andreas Breitenmoser Bürki

Economic & Swiss Research

Tel. +41-44-235 39 43

Schweizerischer Gewerbeverband (SGV)

Dr. Rudolf Horber

SGV Political Secretary /
Member of the SGV Executive Board

Tel. +41-31-380 14 34

Edgar R. Minder

SGV Press Officer

Tel. +41-31-380 14 41

UBS publications and forecasts for Switzerland: www.ubs.com/economicresearch