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UBS Outlook, 4th Quarter 2002: Swiss industrial recovery falters
The absence of a boost from exports and weak domestic demand brought the stuttering Swiss industrial recovery to a standstill in the summer. Nonetheless, companies polled in the latest UBS survey see some light at the end of the tunnel.
Swiss industry suffered a severe setback in the third quarter. Domestic demand weakened as the anticipated boost from exports failed to materialize. According to the results of the latest UBS quarterly survey, which covered over 300 industrial companies, the situation worsened markedly up until September. In particular, the watchmaking, machinery, plastics and metal industries suffered a significant decline in business activity. The UBS business cycle indicator, a trend barometer of business activity which is derived from the results of the survey, suggests that the economy will remain sluggish. However, companies are expecting a consolidation in the fourth quarter.
Decline in all indicators
The companies surveyed by UBS experienced an even sharper year-on-year decline in almost all indicators during the third quarter. Against the background of a delayed economic recovery in Switzerland's most important foreign markets and extremely restrained capital spending, the contraction in order volumes accelerated slightly. Both domestic and export sales were down on the prior-year period. The export-oriented sectors, in particular, were forced to introduce wide-ranging price cuts in the face of continuing weak demand and the high Swiss franc exchange rate. As a result, there was no recovery in profitability. Only 20% of companies reported higher earnings, while 46% suffered a fall.
Hopes resting on final quarter
Although industrial output is likely to remain weak in the short term due to thin order books and the low level of order backlogs, industry is more optimistic for the fourth quarter. The UBS survey is not yet showing expectations in positive territory for any indicator, but overall companies now reckon that whilst orders from abroad will stagnate, domestic orders will fall significantly less than they did in recent months. Due to reduced inventories of finished goods, production levels can probably be maintained. In contrast, an early end to adjustments in headcount is not in sight as these usually lag behind the economic cycle. With the exception of the chemical and pharmaceutical industries, job cuts are planned up until December in all sectors of the economy. One company in three believes it will need to take such measures.
Picture differs according to industry
In the third quarter only the food, chemical and pharmaceutical sectors were expanding. Whilst textiles and electrical engineering were able to make up ground, they have not yet been able to move into positive growth rates. The crisis-ridden timber and furniture industry continued its decline, recording the worst results of all, and the situation has cooled markedly in the other sectors. Although there is a widespread reduction in pessimism regarding the final quarter of 2002, food, textiles, chemicals and pharmaceuticals are the only sectors anticipating positive growth rates in incoming orders, production and sales.
UBS business cycle indicator and Swiss GDP
(% change year-over-year)
Sources: seco (GDP); UBS (survey and calculations) *preliminary official data
Zurich / Basel, 14 October 2002