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2013: Export Sector Gains Momentum, Domestic Economy Remains Robust

Credit Suisse Publishes its Sector Handbook 2013

Credit Suisse published its Sector Handbook 2013 today. Despite the difficult environment, most sectors of the Swiss economy held up surprisingly well in 2012. Domestic demand was robust thanks to low interest rates, the stable labor market and brisk immigration, whereas the global economic slowdown and the strong franc posed major challenges for many sectors with international exposure. The mechanical engineering, electronics and metals industries (MEM industries) were hit particularly hard, as was the hotel and catering trade. The export sector looks set to benefit from the modest recovery in global growth during 2013. However, the differences among the various sectors are still considerable. Due to the foreign exchange situation, pressure will be kept up on structurally weak sectors of the economy such as the textile industry and the hotel and catering trade. On the other hand, sectors that are excellently placed to compete at global level – such as the pharmaceutical and watch industries – will see dynamic development, but will lag the prior year's high growth rates. In particular, the Credit Suisse economists ascribe above-average medium term potential to health-related sectors such as the pharmaceutical industry and healthcare services.

Most sectors of the Swiss economy will remember 2012 as a mixed year. The euro crisis, the strong Swiss franc and the global economic slowdown posed major challenges for exporters in particular, although the domestic economy was in generally robust form. The various industrial sectors moved in different directions. Following a downturn in 2011, exports by the pharmaceutical-chemical industry picked up significantly in 2012 (+6%). Watch exports soared yet again, even managing to break through the CHF 20 bn barrier for the first time, although growth tailed off. By contrast, many traditional industrial sectors such as textiles and metals posted significantly lower turnover than in 2011. The mechanical engineering sector was also hit hard, with exports in some segments even reporting decreases in the double-digit percentage range. Especially in the mountain regions, the hotel and catering trade came under heavy pressure due to the strength of the Swiss franc and the economic slowdown in its traditional European markets. 2012 proved somewhat better for retailers than the exceptionally weak prior year, but nominal growth was insufficient for a return to the turnover level seen in 2010.

2013: Industry Poised for Economic Upturn
First and foremost, 2013 is likely to bring an upturn in momentum for the export industry, as it benefits from the anticipated moderate recovery in the global economy. The impact of the strong Swiss franc will continue to be felt in most sectors, but the Swiss National Bank (SNB) is set to maintain its successful defense of the exchange rate floor. In combination with higher inflation abroad, this should result in a slow but sure real depreciation of the Swiss franc, which in turn will gradually improve the competitive position of Switzerland's export enterprises. However, the substantial differences among the various sectors will continue in 2013. The mechanical engineering, electronics and metals industries (MEM industries) will remain under pressure at the start of the year. However, this significant export sector should also move into positive territory during the year on the back of rising global demand for capital goods. The pharmaceutical industry too is set to increase output and turnover thanks to growing demand, even though price pressure remains high. In addition, growth momentum will be critically dependent on successful research and approval activity. Moreover, the economists at Credit Suisse expect the watch industry to continue along its growth trajectory in 2013; however, the slowdown in key Asian markets will restrict its growth rates to the single-digit range, in contrast to the figures seen in the last three years.

Major Differences Continue in the Service Sector
2013 is going to be another difficult year for the hospitality sector, which is battling structural problems. Nevertheless, the situation here should stabilize somewhat thanks to the slight improvement in global economic performance and the slight real devaluation of the Swiss franc. In retailing, we expect price erosion to decelerate, so turnover will probably grow again in line with the average for previous years. Management consultants, legal advisors and IT service providers are set to benefit from various factors, including the financial sector's ongoing adaptation to new regulatory guidelines. Another factor is that many companies exposed to international competition are having to optimize their processes in order to cut costs. This will keep demand for various advisory services at a high level.

Medium-Term Outlook: Health Trend Drives Growth
Performance in individual sectors is impacted not only by short-term economic influences, but also by structural factors that mainly produce medium- and long-term effects. The Credit Suisse economists compile every year a medium-term opportunity-risk profile of the main Swiss sectors to focus on these aspects. This year's results show that health-related sectors such as the pharmaceutical industry and the healthcare sector itself hold out the best prospects in the medium term. This positive assessment is due to the steady growth in demand for health and care services. Demographic change is a key driver of this demand. The opportunity-risk profiles are above average for numerous service providers, and also for the watch industry.

Traditional Industrial Sectors under Heavy Pressure
On the other hand, five sectors have below-average profiles. Globalization offers opportunities for the Swiss hospitality industry to tap new markets, but it also entails the risk of stronger competition from foreign destinations. However, the main pressure on this sector comes from supply-side structural problems. The salient features of the hotel and catering sector are overcapacity, strong competitive pressure and low profitability. For a long time now, traditional sectors such as the furniture, metals, textile and apparel industries have had to cope with intense global competition and price pressure. The advance of digitalization and the unwillingness of consumers to pay for online content harbor particular risks for the printing and publishing industries.

Mid-Field: Very Mixed
There are a number of economic sectors where medium-term opportunities and risks balance each other out. Saturation of the domestic market is limiting growth potential for many enterprises such as retailers, automobile dealers, insurance companies, telecoms providers and food manufacturers. In the construction industry, positive prospects for demand are thwarted by the widespread structural risks that prevail in this sector. The sectors with average opportunity-risk profiles also include a number of industries such as electronics, chemicals, plastics and mechanical engineering. Quality and niche strategies have enabled many Swiss companies in these areas to secure good international positions. However, there is a steady upturn in foreign competition – and the price pressure that it generates.