What Can Swiss Industries Expect in 2015?
The end of the EUR/CHF exchange rate floor and subsequent appreciation of the Swiss franc are likely to head the agenda for many industries in 2015. The main losers will be hospitality, the mechanical and electrical engineering industries, and retail.
Swiss economic growth was turbulent in 2014. While foreign trade picked up speed after 2013, there were some setbacks. In Switzerland the "supercycle," driven by low interest, a real estate pricing boom, and high immigration rates, began to lose steam. For most service industries that were primarily focused on the domestic market, this meant slower growth and lower employment figures in 2014. Retailers and service providers were affected to the same extent as the government-related sectors of education, health, and social services. The latter industries bore the brunt of higher savings pressure on public budgets, among other things. For the construction industry, however, 2014 was very lively thanks to continued low interest rates and extensive planning activities in the preceding years. Unlike the domestically focused service industries, the export industry picked up the pace, though to a lesser extent than expected and not across the board.
2015: The requirements have changed
2015 began with a monetary policy shakeup. The franc appreciated greatly after the CHF/EUR exchange rate floor was lifted, thereby making Swiss products and services immediately more expensive versus their foreign counterparts. The export industry suddenly lost its ability to compete on price, and some companies suffered major book losses. However, the stronger franc will likely leave its mark on the domestic economy as well. Thus, for 2015 we expect the general economy will have much lower growth than in 2014, and have revised our GDP growth forecast for Switzerland from 1.6 percent to 0.8 percent. However, with an average exchange rate to the euro of just over 1.00, we do not expect a recession. Thus, the strong franc is likely to be the dominating, but not exclusive, topic for many industries this year. The exchange rate floor was lifted against the background of stagnant global economic recovery and a tailing-off in domestic momentum. The vote in favor of the mass immigration initiative in February 2014 still hangs like the Sword of Damocles over the bilateral agreements with the EU, which are critical for the economy, and the geopolitical risks still loom large at the start of 2015. The new monetary policy's reality is overshadowing other uncertainties and developments, however.
Gloomy outlook for hospitality
Of Switzerland's main industries, hospitality is likely to be the most affected by recent events. Switzerland as a vacation destination has become much pricier now, which will probably mean fewer hotel visits by foreign guests. Moreover, Swiss travelers will have more incentive to spend their vacations in another country. Because the cost basis is almost exclusively in francs, in part because wages account for a large portion of production costs, the industry has little chance to trim expenses.
Most industrial sectors are affected by the appreciation
2015 is likely to be a difficult year for most export sectors as well. The strong franc affects nearly all industries, though in different ways. The extent of the impact on an industry depends not only on export orientation but also on the margin level, the volume of products that are billed in foreign currencies, the percentage of costs that originate in Switzerland, and the customers' price sensitivity. The mechanical and electrical engineering industry, which is strongly export-focused, is expected to react especially sensitively; its growth track was a rocky one even before the franc appreciated again. Sales in the chemicals and pharmaceuticals industry are not likely to grow much year-on-year either, due to the exchange-rate effect, and the same applies to watch manufacturers. However, manufacturers of pharmaceuticals and watches should withstand the situation better than companies in other industrial sectors, because they can better absorb the appreciation by raising their margins. Given the exchange rate situation, the processing industry looks set to cut jobs in 2015.
Retailers suffer the most from a strong franc among the service industries
The strong franc is likely to be a predominant issue for retailers as well in 2015. We expect that shopping tourism, which was already at a high level, will be boosted and thus we believe that retail sales this year will be lower than in 2014. This, in turn, will likely impede employment in the industry. Apart from the banks, the strong franc should have a comparatively low impact on most other service industries this year. We expect that, following some delay, the stronger franc will mean lower overall economic demand for workers. Combined with lower immigration, this will stunt demand for telecommunications and hospital services, for instance. However, we do not expect this effect to be noticeable before 2016. Service providers and IT companies will see lower growth in sales and employment this year than in 2014, because their finance and industrial customers' consulting and IT budgets will be tight under the strong franc. However, both industries will still benefit from key trends such as increasing regulation, especially in the financial sector, and from rapid technological progress, which will force companies to make investments in productivity-boosting IT solutions.
Healthcare-related sectors and IT have the best mid-term outlook
Individual sectors are currently subject not only to economic and exchange-rate related fluctuations, but also to structural factors and trends that have a medium and long-term impact. In this context, each year we create a medium-term opportunity-risk profile of the main Swiss sectors. One of the leading multi-sector trends included in this opportunity-risk profile is demographic change. Coupled with advances in medical technology, which are continually providing new diagnostic and treatment options, the aging population of the industrialized nations means a constant increase in demand for healthcare, nursing care, and support services, along with products from the pharmaceuticals and medical technology industries. Thus, these industries lead the pack in the opportunity-risk profile. Another sector with an above-average opportunity-risk profile is IT. The demand for IT services is driven by technological progress and the ongoing digitalization of the economy and society. The adaption processes of companies in relation to technological progress mean bigger order books for the IT and consulting industries. In this area, the rising number and complexity of regulations, along with stricter compliance requirements, are boosting demand.