UBS Outlook 4th Quarter 2004
Upturn in Swiss industry takes hold. As expected, Swiss industry stepped up a gear in the third quarter. As the latest UBS survey reveals, the strong upswing which was initially driven by foreign demand is increasingly spilling over to the domestic economy.
The results of the UBS quarterly survey of the business trend in around 300 industrial companies conducted in September confirm our assessment of a continuing, broad-based recovery in Swiss industry. Orders received picked up sharply in all sectors of the economy in the third quarter, with all bar one posting increased sales. Companies are also confident that this pleasing level of growth will persist in the final quarter of 2004. Until now, the impetus has come mainly from foreign demand, but the upturn is now set to spread more and more to the domestic economy. The UBS Business Cycle Indicator, which is calculated from the survey results and serves as a barometer of the near-term trend in gross domestic product, points to slightly higher rates of growth in the second half of 2004 than the effective +2% recorded in the second quarter of the year.
Industry growing strongly
Overall, 55% of the companies polled in the UBS survey recorded a positive sales trend in the third quarter, with only 20% reporting a decline. Capacity utilization edged up from 85% at the end of June to 86% at the end of September. Firms ramped up production in response to increased utilization of production facilities and buoyant order levels. Despite this adjustment to higher demand, work backlogs have grown more strongly, reflecting the lag between a pickup in orders and the adjustment of production capacities. With demand currently rising faster than production, downward pressure on prices is likely to ease slowly. Certain segments, such as metals, textiles, watchmaking and the timber and furniture industries, have already succeeded in pushing through modest retail price increases, but overall, the companies polled report that prices are still falling slightly. As a result, earnings were positive, but much less so than sales.
The improving business trend has finally begun to feed through to the employment situation: just 16% of firms reduced headcount between July and September, while 20% recruited more staff. Even so, the firms in our survey still reported slightly lower headcounts at the end of September than one year earlier.
Growth is expected to remain equally brisk in the final quarter of 2004. Companies remain highly optimistic about incoming orders and work backlogs, and growth prospects look to be intact. Both domestic and foreign demand are expected to be strong, while firms expect earnings to improve further although retail prices continue to decline slightly. Employment prospects in the industrial sector remain muted, however: the number of firms expecting to increase headcount in the remaining months of the year and the number anticipating job cuts are evenly balanced, though the vast majority expect staffing levels to remain unchanged.
Good prospects across the industrial landscape
In the major trends, the differences between the segments have narrowed somewhat. The watchmaking industry is the most optimistic for the months ahead. Apart from the metals and chemicals/pharmaceuticals segments - the highfliers in the third quarter - and the machinery industry, watchmaking is the only segment planning to recruit new staff. The capital goods industry is also forecasting a continued positive trend in orders and sales, while the plastics industry expects business to be most subdued.
UBS Business Cycle Indicator and gross domestic product
(Change year-on-year in %)
Sources: seco (GDP); UBS (survey and calculations)
Zurich / Basel, 8 October 2004