Credit Suisse : Easing in the MEM Industry, Hotels & Catering, and Retailing

Two years after the abandonment of the EUR/CHF exchange-rate floor, the recovery has gradually reached one of Switzerland's key export sectors. In their 'Sector Handbook', which is published today, the Credit Suisse economists assume that the machinery, electrical engineering and metals (MEM) industry will grow slightly in 2017 again for the first time since the currency shock of early 2015. However, the persistent strength of the Swiss franc continues to pose challenges - particularly for smaller industrial SMEs. Business services and government-related sectors such as healthcare are likely to be the most dynamic performers among the domestically oriented sectors. Medium-term, in light of various megatrends such as digitalization and demographic aging, the Credit Suisse economists see above-average growth potential for IT service providers, as well as the pharmaceuticals, healthcare and medical technology sectors.

The 'Sector Handbook' published today by the Credit Suisse economists shows that in most cases the Swiss economy has overcome the Swiss-franc shock of early 2015. Nevertheless, the recovery has not yet fully reached all sectors. The export industry shows a divided picture: on the one hand, the pharmaceuticals/chemicals industry and the medical technology sector grew at a very dynamic rate in 2016. On the other, exports by the MEM industry continued to fall slightly. The watch industry had an exceptionally poor year: with exports down by more than 10%, 2016 was the sector's most difficult year since the crisis of 2009. In 2016 there were variations not just between the sectors but also between SMEs and large corporations. While most larger industrial firms have absorbed the Swiss-franc shock, many smaller industrial SMEs continued to suffer from diminished price competitiveness and depressed margins.

MEM Industry to Grow Again in 2017 for First Time since Swiss-Franc Shock
The gap between the different export sectors is likely to go on closing in 2017 - though not entirely. The Credit Suisse economists expect a slight rise in exports by the MEM industry in 2017 again after the falls seen in both of the last two years - especially in the machinery sector. The most important drivers of this recovery are the solid economic conditions in destination countries and the stabilization of the Swiss-franc exchange rate. Although the more domestically oriented metals industry is likely to benefit from the stabilization of the construction trade, pressure on prices and imports remains high. The positive momentum should increasingly spread to smaller SMEs within the MEM industry in 2017, even though many of them are likely to continue to feel the effects of structural Swiss-franc strength to a greater degree than major internationally diversified corporations. On the other hand, the authors of the Sector Handbook do not expect the watch sector to return to growth this year: various factors that affected the watch industry in 2016 are likely to remain in place in 2017, too - particularly the uncertainties regarding the future development of tourism in Europe due to the fear of terrorist attacks. However, the Credit Suisse forecasts indicate that the chemicals/pharmaceuticals industry and the medical technology sector will in all likelihood benefit from robust global demand for healthcare goods again in 2017 and make a key contribution to the growth in Swiss exports. As for hotels and catering, the Credit Suisse economists expect a stabilization; there is even a possibility that the number of overnight stays will increase slightly.

Stabilization in Retailing; Further Growth in Healthcare
For the domestically oriented retailing sector, the Credit Suisse economists expect a gradual stabilization of sales in 2017. This means at least an easing compared with the falls seen in both of the last two years. Although shopping tourism is unlikely to increase any further, e-commerce is set to go on growing - a trend that will hit bricks-and-mortar retailing. Overall, private consumption is likely to grow only modestly given lower population growth, stagnating purchasing power and below-average consumer sentiment.
The weaker population growth is also slowing the demand for accommodation, posing medium-term risks for the construction and real estate sectors as well as other construction-related segments such as architecture practices. The Credit Suisse forecasts nevertheless indicate that construction-sector sales will remain at a high level in 2017 given brisk investment in real estate on the back of low interest rates. As a result, the finishing trades are also expected to recover again after a weak 2016.
In addition, the Credit Suisse economists expect the government-related healthcare, social services and education sectors to continue growing in 2017 due to existing demographic drivers. Once again, however, momentum is likely to be below the long-term average given that persistently tight government finances in various cantons and associated austerity measures will act as a brake. In other domestically oriented sectors (such as the food industry, telecommunications sector and printing & publishing), the rather sluggish development of private consumption is preventing strong growth. 2017 will see business service providers such as lawyers and consultants continue to benefit from increased regulatory and compliance requirements, particularly in the financial sector, while IT service providers will be buoyed by ongoing digitalization.

Healthcare-Related Areas and IT Have the Best Medium-Term Prospects

The Credit Suisse economists believe the IT sector has the greatest potential in the medium term (i.e. the next three to five years). In their cross-sector opportunity/risk assessment, which is based on an analysis of the key growth trends and risks, they rate IT service providers as highly above-average given that the sector is benefiting from technological progress and the increasing digitalization of business and society. The Credit Suisse economists also rate the healthcare sector, pharmaceuticals industry and medical technology sector as above-average. Coupled with advances in medical technology, increasing demographic aging in the industrialized countries is leading to steady growth in demand for the services and products of these sectors.
However, not every sector is a winner when it comes to digitalization: printing and publishing is once again accorded a significantly below-average opportunity/risk assessment for 2017, as in previous years. The medium-term assessment for many export-led industrial sectors is also below-average, given that they still have to contend with the structural effects of the strong Swiss franc.