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Reverberations from the Swiss Franc Shock Are Expected Above All in the MEM and Hotel/Catering Industries in 2016

Credit Suisse published its Sector Handbook 2016 today. Although it is now more than a year since the EUR/CHF exchange rate floor was removed, export-oriented industrial sectors in particular such as the mechanical engineering, electronics, and metals industry (MEM) and hotels and catering are likely to suffer this year from the strength of the Swiss franc. According to forecasts by Credit Suisse economists, the industrial sector and hotels and catering are expected to shed around 1.6 percent of their jobs in 2016. However, provided the EUR/CHF exchange rate settles at around 1.10, the export industry could bottom out in the second half of 2016 thanks to a slight improvement in the global economy. The domestic economy, on the other hand, is likely to lose some of its momentum again this year, but still see moderate growth. In particular corporate service providers and government-related sectors such as healthcare should continue to create jobs in net terms, according to Credit Suisse economists. In the medium term, the economists ascribe above-average growth potential to IT service providers, and the pharmaceutical, healthcare, and medical technology sectors owing to various key megatrends such as digitalization and demographic aging.

2015 will go down in economic history as the year of the Swiss franc shock. The removal of the EUR/CHF exchange rate floor by the Swiss National Bank in January 2015 put the Swiss export sectors under massive pressure. But thanks to a persistently robust domestic economy, Switzerland narrowly avoided recession. As a consequence of the exchange rate shock, however, producer and import prices in the industrial sector fell more sharply than they had for decades. In addition, prices in the hotel and catering and retail/wholesale sectors came under significant pressure. As a result, sales and margins in 2015 were down in many sectors, in some cases significantly so. Sales fell particularly sharply in the mechanical engineering, electronics, and metals industry (MEM). These sectors derive a significant portion of their sales from exports to the eurozone, and were thus hit particularly hard by the strong franc.

After-Effects of Swiss Franc Shock Expected for 2016
Even though it is more than a year since the EUR/CHF exchange rate floor was removed, the consequences are expected to persist in 2016, according to Credit Suisse economists. Even a EUR/CHF exchange rate of around 1.10 represents a challenge for many companies from the export industry, for the Alpine tourism industry that is heavily dependent on European guests, and for the retail trade. Many companies in these sectors will have to boost their efficiency in order to generate the same margins as before the removal of the EUR/CHF exchange rate floor. It is also likely that investment decisions in the future will more often disadvantage Switzerland as a production location and that jobs will be increasingly outsourced. Despite these after-effects of the strong Swiss franc, Credit Suisse economists expect the Swiss economy to grow in 2016 – albeit still well below its potential, but still slightly more than in 2015. This is because of renewed growth in the domestic economy and slightly improved prospects for the export sector.

Export Industry to Bottom Out in 2016, but Still Challenged
The global economy is expected neither to improve nor deteriorate markedly in 2016. This means that the economies of some of the major emerging-market countries will remain on the weak side. The gradual recovery of the eurozone, which is key for the Swiss export industry, is expected to continue, according to economists at Credit Suisse, and it is anticipated that the US economy will remain relatively robust. Without a significant devaluation of the Swiss franc, no marked, broad-based recovery in export growth can be expected. Provided that the franc, at the very least, does not appreciate further, the export industry could nonetheless bottom out during the second half of 2016. This particularly applies to cyclical sectors and those affected early and severely by the franc shock, such as MEM or the chemical industry. However, in the coming months, the sometimes painful process of adapting to the new exchange rate situation is likely to continue in these sectors. In the first half of 2016, according to the economists, the manufacturing industry is likely to see further job reductions, outsourcing abroad, and bankruptcies.

Switzerland as a Vacation Destination Still Too Costly in 2016 for Many (European) Guests
The strong Swiss franc also continues to affect hotels and catering. This is likely to be felt in the winter season 2015/2016 in particular, as the industry was left largely unscathed by foreign guests staying away in the winter of 2014/2015 due to early bookings. Credit Suisse economists are thus expecting that this will lead to a further decline in employment in the sector in 2016. But the downward momentum in the hotels and catering industry should start to slow increasingly as the European economy recovers, provided the EUR/CHF exchange rate stabilizes in the region of 1.10.

Domestic Economy Still to Hum in 2016, but Somewhat Quieter Than in Previous Years
The domestic economy is likely to lose a degree of momentum again in 2016, but still see moderate growth. The labor market situation is deteriorating slightly due to structural adjustments in connection with the strong Swiss franc. This is likely to cause consumer sentiment to remain somewhat subdued and sectors such as retailing at best to stabilize in terms of sales, compared to 2015. Interest rates nevertheless remain low and immigration is likely to remain robust, thereby supporting both consumer demand and the need for housing. This will benefit sectors such as transportation and telecommunications. The construction industry is likely to stabilize in 2016 after a relatively weak 2015, which will benefit architectural firms and other construction-related sectors such as the wood, metal, and plastics industries. Corporate service providers such as lawyers and consultants will continue to benefit from the consolidation of international private banking, among other things, and IT service providers from the increasing digitalization of business and society. The education, healthcare, and social services sectors are likely to see further robust growth this year, although these sectors are under increased cost pressure owing to tight public finances in many places.

Healthcare-Related Sectors and IT Offer the Best Medium-Term Prospects
Swiss sectors are affected not only by short-term economic fluctuations, but also by structural factors and trends that have a medium- and long-term impact. Credit Suisse economists compile a yearly medium-term opportunity-risk profile of the main Swiss sectors in order to focus on these aspects. One of the leading multi-sector trends included in this opportunity-risk profile is demographic change. Coupled with progress in medical technology, the aging populations in industrialized countries are leading to a steady rise in demand for healthcare services, and pharmaceutical and medical technology products. These sectors therefore rank at the top end of the opportunity-risk profile, but it is the IT sector that has the best medium-term opportunity-risk profile. Demand for IT services is driven by technological progress and the ongoing digitalization of the economy and society. But digitalization does not just produce winners. As in previous years, this is attested to, among other things, by the fact that the printing and publishing industry has the worst opportunity-risk profile also in 2016. The medium-term assessment for many export-oriented industrial sectors that have to battle with the structural impact of the strong Swiss franc is also below average.

The publication "Sector Handbook 2016" is available on the internet in English, German, French, and Italian at: www.credit-suisse.com/research