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UBS Outlook 3rd Quarter 2003

| Media Releases Switzerland

Industry in reverse gear. The slowdown in Swiss industry in the second quarter was more pronounced than expected. In the latest UBS survey conducted in June Swiss firms continued to rate the outlook for sales in the third quarter as poor.

Against the backdrop of a weak global economy the order inflow to Swiss industry collapsed again in the second quarter. Both domestic and export sales were down significantly and 37% of the companies surveyed were forced to cut back production. This was revealed in the latest business survey of some 300 industrial firms conducted by UBS in June. No recovery is at present in sight and the majority of companies continue to expect a decline in business activity in the third quarter as well.

In this environment, the UBS business cycle indicator, which reflects the results of this survey and signals growth trends in gross domestic product (GDP) two quarters ahead, points towards an ongoing contraction of the Swiss economy. With official figures putting the change in GDP during the first quarter of 2003 at -0.6% year-on-year, the indicator continues to paint a gloomy picture for both the second and third quarters of the year.

Sharper downturn in second quarter
The industrial companies surveyed by UBS in June reported a sharper downturn in orders received, production and sales during the second quarter of 2003 compared with the same quarter last year. The hopeful expectations expressed by companies in spring have thus been seriously disappointed. Because production was not cut back on the same scale as orders declined, the order backlog fell substantially. Capacity utilization remained at a low 84%, which is substantially below the normal utilization level of 87%. More and more firms were forced to lower their prices in view of the tough competitive environment. Together with the unfavourable Swiss franc / US dollar exchange rate, this had a negative impact on earnings. Only 14% of companies reported improved profitability, whereas 43% reported a drop in earnings.

Companies still adjusting to lower levels of demand
The near-term outlook for industry remains bleak given the sluggish state of the economy in Switzerland and the rest of Europe. The expectations for the third quarter are thus relatively cautious. Progress in domestic sales in particular continues to be viewed with scepticism, but orders from abroad and exports are expected to remain more or less stable. With plant utilization at low levels and order backlogs dwindling, companies are being forced to make further cuts in production and their workforces. The exception here is the food industry, which expects a slight increase in the demand for staff in the period July to September, and the chemical/pharmaceutical industry, which believes it can hold its headcount at the current level. The paper, printing & graphics industry, together with the watchmaking and machinery sectors, are facing the most difficult employment situation.

Scepticism virtually across the board
In line with the overall picture, the mood throughout all the sectors surveyed was generally one of gloom. With the exception of the food processing industry no sector experienced a positive second quarter. Most sectors of the economy are likewise sceptical about their prospects in the months ahead. Whereas the watchmaking, textile and electrical engineering industries, along with paper, printing & graphics, even expect the negative trend to increase, opinions in the timber & furniture, metals and chemicals/pharmaceuticals sectors were on balance more favourable. The only sectors to express absolutely positive expectations with regard to the main indicators (orders received, production and sales) were the food, plastics and metal industries.

Investment plans for 2003 scaled back
Given the still shaky hopes of an upswing in the near future, companies in almost all branches of industry are expressing extreme reluctance to make investments in their businesses at the current time. Only just over 10% have expansive spending plans for 2003, whereas more than half of all the firms surveyed plan to cut their capital expenditures this year. The sole exceptions are the food and printing industries which both intend to invest more.

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

Data (%)

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



Zurich / Basel, 04 July 2003
UBS AG