Hotels/Catering and MEM Industry to Suffer Most from Strong Swiss Franc in 2015
Credit Suisse publishes its Sector Handbook 2015
Credit Suisse has today published its Sector Handbook 2015. The abandonment of the EUR exchange rate floor and subsequent appreciation of the Swiss franc are likely to dominate the agenda for many sectors this year. Credit Suisse economists expect hotels and catering, the machinery, electrical engineering and metals (MEM) industry and the retailing sector to suffer most from the renewed strength of the Swiss franc. By contrast, the bulk of the domestically oriented service sectors should remain relatively unaffected. Versus the strong momentum of previous years, these sectors are nevertheless losing a degree of traction – regardless of the current strength of the Swiss franc. For the first time, the Sector Handbook also includes an employment forecast at sector level. A total of round 0.7% of jobs are likely to be shed in the sectors negatively affected by the strength of the Swiss franc in 2015, i.e. hotels and catering as well as the industrial and trading sectors. The Credit Suisse economists nevertheless anticipate an increase in jobs across the economy as a whole as the business services and government-related sectors continue to create jobs in net terms. In the medium term, the Credit Suisse economists highlight above-average potential growth in the pharmaceutical, healthcare and medical technology sectors. Medium-term prospects are also favorable for the IT and consulting sectors.
Swiss economic growth proved volatile in 2014. Although external trade gained momentum compared with 2013, the acceleration was marked by setbacks. Domestically, the “super-cycle” – driven by low interest rates, booming real estate prices and high rates of immigration – began to lose strength as a growth driver. This resulted in weaker momentum and a lower rate of employment growth for most largely domestically oriented service sectors in 2014. The sectors affected included the retail/wholesale trade and corporate services, as well as government-related sectors such as education, healthcare and social services. Among other factors, the latter sectors felt the impact of the growing pressure to cut costs in the public sector. By contrast, the construction sector experienced strong momentum in 2014 thanks to persistently low interest rates and a high level of planning activity in previous years. Unlike the domestically oriented service sectors, the export industry picked up a bit of momentum – though significantly less sharply than expected and not across the board.
2015: Wholly New Set of Circumstances
The year began with a monetary policy earthquake. With the massive appreciation of the Swiss franc following the abandonment of the EUR exchange rate floor, Swiss products and services instantly became more expensive compared with foreign competitors. The export sector abruptly lost price competitiveness and in some cases had to nurse major book losses. However, the renewed strength of the Swiss franc is likely to have significant repercussions for the domestic economy too. The Credit Suisse economists therefore expect significantly lower growth for the economy as a whole this year compared with 2014 and are revising their GDP growth forecast for Switzerland from 1.6% to 0.8%. In case of an exchange rate to the euro of 1.05 and to the US dollar of 1.00 by the end of 2015, however, they do not expect a recession. The strength of the Swiss franc is therefore likely to remain the dominant – though not the only – theme for many sectors in 2015. The abandonment of the exchange rate floor took place in the context of a hesitant global economic recovery and a slowdown in domestic momentum. The “yes” vote in the February 2014 referendum on mass immigration still hangs like the Sword of Damocles over the Swiss economy’s important bilateral agreements with the European Union, while geopolitical risks are continuing to smolder at the outset of the year. However, the new monetary policy reality now eclipses all of the other uncertainties and developments.
Gloomy Prospects for Hotels and Catering
Of the major Swiss sectors, hotels and catering is probably the one most heavily affected by recent events. Switzerland became a markedly more expensive destination at a stroke, and this is likely to lead to a fall in the number of overnight stays on the part of foreign visitors. In addition, Swiss customers are likely to have a greater incentive to spend their vacation abroad. Since the cost base – in part due to the high share of wages in production costs – is almost entirely incurred in Swiss francs, the sector also has little scope for efficiency improvements.
Most Industrial Sectors Affected by Currency Appreciation
2015 is also likely to be a difficult year for Switzerland’s export sectors. The strength of the Swiss franc hurts nearly every industrial sector – if in different ways. The extent to which an industrial sector is affected depends on its export bias as well as margin levels, the share of products billed in foreign currencies, the share of costs incurred in Switzerland and the price sensitivity of customers. The export-oriented machinery, electrical engineering and metals (MEM) industry is likely to react particularly sensitively, since it had already been on a fragile growth trajectory prior to the Swiss franc’s renewed appreciation. The exchange rate effect means sales in the chemical/pharmaceutical industry are also unlikely to rise much this year compared with 2014, while the story for the watch manufacturers is a similar one. However, manufacturers of pharmaceuticals and watches are likely to be in a better position to cope with this state of affairs than companies in other industrial sectors given that they are more able to cushion the appreciation via margins. In light of the currency situation, manufacturing industry is likely to shed jobs in overall terms in 2015.
Among Service Industries, Retailing in Particular Suffers from Strong Swiss Franc
The strong Swiss franc is also likely to be a dominant theme for retailing in 2015. The Credit Suisse economists expect another boost to the already high level of shopping tourism and therefore anticipate that retail sales will be lower this year compared with 2014. This will probably have a negative effect on employment within the sector. The strength of the Swiss franc is likely to have a comparatively less important impact on most other service industries – the banks excepted – in 2015. The Credit Suisse economists expect the stronger Swiss franc to lead to reduced demand for labor throughout the economy as a whole after a certain time lag; accompanied by lower immigration, this will in turn have a dampening effect on the growth in demand for telecommunication and hospital services, for example. However, the economists do not expect this effect to materialize much before 2016. Corporate service providers and IT firms are also likely to see sales as well as employment grow more slowly this year than in 2014 as the consulting and IT budgets of their customers in the financial sector and industry come under pressure due to the strength of the Swiss franc. However, both sectors continue to benefit from key trends such as increasing regulation, particularly in the financial sector, as well as rapid technological change, which is forcing companies to invest in productivity-enhancing IT solutions.
Healthcare-Related Sectors and IT Have Best Medium-Term Prospects
The individual sectors are not only subject to economic and exchange rate-related fluctuations right now but are also influenced by structural factors and trends that are likely to impact in the medium and long term. On an annual basis, the Credit Suisse economists therefore produce a medium-term opportunity-risk profile for Switzerland’s most important sectors. Demographic change is one of the most important cross-sector trends that are incorporated into the opportunity-risk profile. Coupled with medical/technological advances, which are constantly opening up new possibilities for diagnosis and treatment, the aging population in the industrialized countries is resulting in a steady rise in demand for healthcare, nursing and support services as well as for products from the pharmaceutical industry and medical technology. These sectors therefore rank at the top end of the opportunity-risk profile. IT is also among the sectors with an above-average opportunity-risk profile. Demand for IT services is driven by technological change and the increasing digitization of business and society. The corporate realignment process associated with technological advances is providing additional orders not only for the IT sector but also for the consulting industry. In this sector, ever-more numerous and complex regulations along with growing compliance requirements are contributing to the increase in demand.
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This document was produced by and the opinions expressed are those of Credit Suisse as of the date of writing and are subject to change. It has been prepared solely for information purposes and for the use of the recipient. It does not constitute an offer or an invitation by or on behalf of Credit Suisse to any person to buy or sell any security. Any reference to past performance is not necessarily a guide to the future. The information and analysis contained in this publication have been compiled or arrived at from sources believed to be reliable but Credit Suisse does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof.
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