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UBS Outlook: is manufacturing disappearing?
The media and politicians talk a great deal about layoffs and offshoring in the industrial sector. Switzerland may not be deindustrializing in general, but Swiss manufacturers still have to tackle the challenges posed by the strong Swiss franc and the increasingly service-oriented economy. To combat the specter of deindustrialization, they will have to focus on sectors where they have a comparative advantage.
Zurich, 14 July 2016 – Manufacturers have been announcing plans to cut jobs and shutter plants since early last year. The media and politicians have responded with fear that a tidal wave of deindustrialization might be bearing down on Switzerland.
This fear could not be farther from the truth. Overall, the Swiss industrial sector has had stable job numbers and accounted for a steady share of economic output since 1998. The story is much more complicated for individual industries within the manufacturing sector, however. Labor-intensive, low-innovation industries saw substantial losses in jobs and economic output, while innovative, quality-driven, high-tech sectors posted significant growth, warding off the deindustrialization of the Swiss economy as a whole.
So the Swiss industrial sector is strong, but storms are brewing on the horizon. The strong Swiss franc casts a long shadow over local industrial companies. Also, the shift from a manufacturing-oriented to a service-oriented economy will continue, shrinking the industrial sector’s relative contribution to global economic output. At the same time, manufacturers are seeing higher productivity growth than the overall economy, which inevitably puts pressure on employment. If Swiss manufacturers want to buck the deindustrialization trend, they would do well to stick to the formula that has served them so well over the last two decades – concentrating on the quality-driven, high-value sectors where they have comparative advantages.
Recovery in a shaky environment
The Swiss economy is expected to recover gradually in the second half of the year. Unfortunately, the British electorate’s vote to exit the EU has greatly fueled economic uncertainty and Swiss companies are constantly adjusting to the strong Swiss franc. These two factors will continue to drag down growth momentum. By next year, however, the Swiss economy should have fully adjusted to the new exchange rate reality and be able to edge closer to its potential growth rate again. While economic growth will pick up in the second half of 2016, it will likely remain too weak to turn around the labor market before year-end. UBS economists forecast that the Swiss economy will grow 0.9 percent this year and 1.3 percent in 2017.
They also expect private consumption to be solid in the second half of the year thanks to persistently low inflation. The investment climate may suffer considerably this year due to political uncertainty surrounding the implementation of the mass immigration initiative and the unclear outcome of Corporate Tax Reform III. The prospects for foreign trade will depend on Brexit’s impact on the European economy.
SNB stands ready
In the months to come, the Swiss National Bank (SNB) will be careful not to tap the brakes on the economy's fledgling recovery by allowing the Swiss franc to strengthen rapidly. It responded to the fallout of the Brexit referendum by defending the Swiss franc’s exchange rate and remains poised to block a significant appreciation of the Swiss franc if necessary. A rise in the prime rate appears unlikely this year. If the ECB ends its bond-purchasing program in the spring of 2017, the SNB will probably refrain from raising the interest rate until the fall of 2017.
In developing the UBS CIO WM economic forecasts, UBS CIO WM economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice.
UBS publications and forecasts for Switzerland: www.ubs.com/investmentviews
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