Mechanical Engineering, Electronics, and Metals Industry Still Contracting
The Swiss economy is likely to expand by 1 percent in 2016. While construction is likely to move sideways, we expect a subdued performance for hotels and catering as well as industry as a whole and a slight improvement for retailing.
Swiss Economy Flatlined in 2015
Despite the Swiss franc shock the country's economy avoided recession in 2015 and grew by 0.9 percent in real terms, according to the Swiss Secretariat for Economic Affairs (SECO). This growth figure overstates the trend, however. Fact is, gross domestic product (GDP) was already 0.9 percent above the 2014 average around the turn of the year 2014/15. The reality is that since January 2015 the economy has been more or less flatlining; therefore, it would be much more accurate to describe the Swiss economy as being in stagnation. Government-related sectors such as healthcare, social services and education, as well as the IT and communications (ICT) sectors and real estate, did provide a nominal boost to growth in 2015. In these sectors, nominal gross value added and employment were higher than in the previous year (see charts). Their particularly strong domestic bias coupled with positive demand trends afforded a degree of protection against the strong Swiss franc. However, the strength of the currency left a clear mark on industry, hotels and catering, as well as trading. The latter in particular recorded a significant fall in nominal gross value added, in part due to the adverse impact of the collapse in oil prices on wholesalers.
Sluggish Growth Expected in 2016
Switzerland is likely to experience sluggish economic growth in 2016 too. We are forecasting a GDP growth rate of 1 percent year-on-year. Although the export sector would appear to have bottomed out, it is too soon to talk of a broad-based recovery in exports. The Swiss franc remains overvalued and global demand will be slow considering sluggish economic activity in key destination markets. Additionally, the domestic economy is likely to go on losing momentum. The overvalued Swiss franc means many companies continue to face the challenge of having to restore their competitiveness and cut costs. This is likely to put a slight brake on investment activity and increase the rate of unemployment. We expect unemployment to reach 3.8 percent by the end of 2016. Consumer sentiment is therefore likely to remain subdued this year.
Significant Fall in Industry Sales in 2015
A look back at 2015 as a whole confirms what was already increasingly evident at the start of the year. The strength of the Swiss franc caused industry sectors to suffer a significant fall in sales, primarily due to major price concessions on the part of Swiss companies. But demand fell in real terms, too, in sectors such as the food and metals industries as well as mechanical engineering. While the food industry was hit by increased shopping tourism on the part of the Swiss population, the metals industry had to contend with stronger competitive pressures from foreign players and weaker levels of business in destination sectors such as mechanical engineering. The watch industry was affected by falling demand, mainly due to retail watch sales in Hong Kong, with the latter having suffered from a decline in tourism from mainland China. The chemical/pharmaceutical sector was similarly affected by falling sales, but is likely to have been more successful than other industry sectors at absorbing the decline thanks to a simultaneous, sharp fall in commodity prices (above all crude oil) as well as high margins in some areas.
Industry Recovery Likely to Be Very Hesitant in 2016; Sector Differences Remain Wide
We expect a subdued trend for industry as a whole in 2016, although the picture varies sharply from sector to sector. The business trend in the chemical/pharmaceutical industry will likely be moderately positive over the coming months thanks to rising demand. The food industry is likely to see slight growth at best, owing to the continued strength of shopping tourism and the strong Swiss franc. In view of the fall in the orders backlog in the previous year, we do not expect the situation in mechanical engineering to stabilize until the second half of 2016 at the earliest. Sales in the metals industry are likely to continue declining in 2016, if at a slower rate than in 2015. Business in the watch industry will likely remain subdued due to the probability of a sluggish demand trend in key markets.
Construction Likely to Flatline in 2016
After a long growth run, 2015 proved a mixed year for the construction sector. Reasons included the completion of a number of major civil engineering projects, uncertainty caused by the second-homes initiative as well as excess regional supply in the office and retail property markets. We expect construction sales to flatline in 2016. Although the construction of rental apartments should provide a fresh boost to growth, the finishing trades are unlikely to see a recovery until the second half of the year. In addition, the fact that demand for residential property is no longer keeping pace with supply will likely dampen sales for construction companies.
Slowdown in Automotive Trade in 2016, Slight Improvement in Retailing and Fading Downward Momentum in Hotels and Catering
Retailing suffered a significant fall in sales and prices in 2015 due to increased shopping tourism and growing uncertainty on the labor market. The hotels and catering sector was also hit by a decline in sales as a result of the strong Swiss franc – above all due to a significant drop in the number of overnight stays by European guests as well as price concessions. By contrast, lower import prices thanks to the strong Swiss franc enabled the automotive trade to post a record year for sales. The downward momentum in hotels and catering is likely to fade in 2016, while retail sales should stabilize. In the automotive trade, however, we expect demand for new cars to become increasingly satisfied with sales volumes likely to grow at a much slower pace. Indeed the possibility of a decline cannot be ruled out.