Industry sees confidence confirmed
The sharp improvement in sentiment seen in industry earlier this year has already led to significantly more stable business activity. But according to UBS it will not be until the third quarter that the upward trend really takes hold.
UBS Outlook, 3rd Quarter 2002
Following the gloomy business trend in the first quarter, Swiss industry was almost unanimous in predicting a distinctly brighter outlook. This optimism has been largely confirmed in the figures for the second quarter. The results of the latest UBS quarterly survey, conducted in June among some 300 industrial companies, show that industrial activity has turned the corner. On balance, business activity as an average of orders received, production and sales has improved in all but one sectors, and this improvement has been impressive: while on balance 32% of firms saw their business activity decline in the first quarter, the corresponding figure was just 11% in the second quarter. The economic recovery now under way should gain further momentum in the third quarter.
UBS business cycle indicator points to turnaround
The UBS business cycle indicator, which is based on the survey results, charts the industry trends in relation to overall economic performance. As a barometer of gross domestic product (GDP), it is a reliable indicator of cyclical turning points and leads official data by two quarters. In March it had already signalled a consolidation in real GDP growth in the second quarter, and this is confirmed by the latest data. The indicator also signals much more positive dynamism for the third quarter.
First signs of recovery
All the indicators show that industrial activity moved out of the doldrums in the second quarter. Although taking the average of all companies no positive values were achieved, the difference between positive and negative replies is without exception now much closer to a turnaround: only 12% of firms recorded a drop in orders, compared with 36% in the first quarter. At the same time, some of the excessive stocks of finished goods were reduced, and both production and order backlogs fell less sharply than before. The decline in sales and earnings also slowed, though the recovery here was checked both by the strong franc and by the continuing reluctance to invest in capital goods. The trend in headcount was still muted, with a balance of 22% of companies reporting a fall on the prior-year level, but even this represents an improvement on the first quarter.
Upward trend emerging
The UBS survey points to a positive trend in business activity in the third quarter. Companies expect an increase in foreign orders, whereas domestic orders are expected to stagnate. As a result, the production cutback should be coming to an end. Firms in a number of sectors are even planning to increase production. By and large, they are hoping for a recovery in sales and an easing of the earnings squeeze, but this is likely to be limited on account of the sustained pressure on prices. Because the upturn is only in an initial phase, there are no signs yet of a turnaround in headcount. One in nine firms regards a further reduction in staff numbers between July and September as necessary.
Marked differences between sectors
The upturn in the second quarter varied widely in strength across the different sectors of industry. Food continued its unchecked upward trend, making it the only sector where business activity has never slipped into negative territory during the current cycle. Chemicals/pharmaceuticals, watchmaking and paper also moved back to positive growth. Some sectors on the other hand, chief amongst them textiles, timber & furniture and capital goods, remained mired in cyclical depression, though the low point seems to have passed. The only sector still languishing was printing, where business activity in fact fell sharply.
The third quarter is forecast to be much better for all sectors except paper and watchmaking. For the first time since the start of the year, companies surveyed even expect business activity to be largely positive. Thanks to ongoing good consumer demand, the growth leader is the food industry, followed by textiles and chemicals/pharmaceuticals. However business activity in the plastics, printing/graphics, machinery, metals and timber/furniture sectors is unlikely as yet to move into positive territory.
UBS business cycle indicator and Swiss GDP
(% change year-over-year)
Sources: seco (GDP); UBS (survey and calculations)
*preliminary official data
Zurich / Basel, 4 July 2002