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UBS Outlook 3rd Quarter 2004
Growth continues in Swiss industry. The upturn in Swiss industry continued in the second quarter and should gain strength over the coming months. According to the latest UBS survey, the main growth driver was a strong increase in new orders from abroad.
The upturn in the Swiss industrial sector continued as expected in the second quarter, and a glance at the trend across the board reveals a promising picture. With a single exception, all sectors of industry represented in the UBS survey posted a significant increase in orders received, production, order backlogs and sales vis-à-vis the previous year. The main impetus was provided by strong demand momentum from abroad, with domestic demand also solid. The industrial sector looks set to shift up a gear in the third quarter.
The UBS business cycle indicator, which is calculated on the basis of the results of UBS's quarterly survey of 300 industrial companies, shows that the Swiss economy is currently on a solid growth path. With a two-quarter lead over official GDP data, the trend barometer indicates how the economy is likely to perform over the coming months. After real year-on-year growth for the Swiss economy of 1.5% in the first quarter, this leading indicator now points towards continued momentum for the second and third quarters.
Vigorous business growth
According to the June survey, the improvement in industry gathered pace in the second quarter. While 35% of firms surveyed reported higher export sales in the first quarter of 2004, this proportion rose to 50% in the second quarter, with an almost unchanged 18% of firms seeing a decline in shipments abroad. This development provided a particular boost to business in the metals, machinery and electrical engineering sectors. Together with chemicals and pharmaceuticals, these sectors recorded the strongest growth trends. Business in the watchmaking and plastics industries performed more or less in line with the overall average of the industrial sectors. The only sector to witness a decline in business activity was paper, printing and graphics.
Production in the industrial sector as a whole was stepped up further. Thanks to higher sales volumes and strict cost controls, earnings finally started to recover, but not quite as fast as sales: 36% of firms saw their profitability improve, while 25% posted a decline in earnings. With the recovery in demand and increasing capacity utilization, pressure on prices has generally fallen, although only a minority of companies (14%) have succeeded in raising prices. The majority (60%) reported unchanged prices, while 26% of firms have found themselves having to continue to offer discounts. Demand for labour appears to be stabilizing gradually - although companies are operating with considerably smaller headcounts than last year, levels stayed the same as in the previous quarter after two-and-a-half years of continuous decline.
Industry remains optimistic
Fuller order books and increasing work backlogs signal good growth prospects for the third quarter. The firms polled by UBS are accordingly optimistic with regard to the near-term outlook, and anticipate improved demand from both Switzerland and abroad. As a result, capacity utilization will probably rise from the current figure of 85.0% to 86.2% in the third quarter. What is more, increased utilization of production facilities and bigger work backlogs are causing every second company to increase production, while output is being reduced by just one in ten. Despite still lower prices, companies expect their earnings situation to improve further. For July to September, the watchmaking, food and metals industries, as well as chemicals and pharmaceuticals, report a need for additional staff. The employment situation remains the most difficult in the paper, printing and graphics and the timber and furniture sectors.
UBS Business Cycle Indicator and gross domestic product
(Change year-on-year in %)
Sources: seco (GDP); UBS (survey and calculations)
*provisional official figures
Zurich / Basel, 2 July 2004