MEM industries: encouraging year in 2018 – outlook uncertain

Last year, new orders received by the Swiss mechanical and electrical engineering industries (MEM industries) increased by 6.5 percent on 2017. Sales also rose strongly year-on-year, by 11.4 percent. Big companies and SMEs benefited in equal measure from higher orders and sales. This positive business trend had an impact on capacity utilization in companies: at 91.3 percent on average, it stayed considerably above its long-term average of 86.4 percent throughout the year. The employment situation also developed positively, with the number of people employed by the Swiss MEM industries increasing by 7,800 positions to 320,400 positions in the first nine months of last year.  Furthermore, the earnings situation also improved slightly compared with the previous year. In the survey for the 2018 financial year, 13 percent (2017: 14%) of companies reported a loss at the EBIT level. A positive but ultimately unsatisfactory margin figure of 0 to 5 percent was reported by 24 percent (2017: 26%) of companies. All the same, 44 percent (2017: 40%) of companies generated a good margin of over 8 percent. On balance, the MEM industries were not yet able to offset the margin losses suffered after the scrapping of the euro minimum exchange rate.  Rising exports in all product categories The strong business performance is being reflected in the MEM industries’ exports, which grew by 4.4 percent in 2018 to total CHF 69.7 billion. Exports to the United States rose particularly strongly (+9.5%), and exports to the EU also increased (+5.4%). Only exports to Asia declined, by 2.1 percent; this is attributable above all to the challenging business situation in the Middle East. The positive trend on the whole covered exports in all the important product groups: compared to 2017, exports of precision instruments rose by 7.4 percent, metals exports by 5.5 percent, electrical engineering and electronics exports by 4.6 percent, and machine tool exports by 4.5 percent.  Deterioration in second half of 2018 Overall, 2018 was a very good year for the MEM industries. Having said that, the very high growth momentum did slow considerably in the third and fourth quarters of the year. While sales increased by 8.5 percent (Q3/18) and 5.7 percent (Q4/18) respectively over the year-back periods, new orders received fell substantially year-on-year in the third (-6.0%) and fourth (-11.3%) quarters. However, these significant declines need to be put into perspective a little, as incoming orders in the year-back periods had reached a very high level.  Due to the economic slowdown in the key markets, Swissmem Director Stefan Brupbacher is not expecting the upturn to continue: “The stimuli for growth from abroad are not there. As a result of the general slowdown in many central markets, what we are thus likely to see is a sideways movement in business development for the MEM industries in the coming months”. Apart from this, Brexit, the debt situation in a number of EU countries and the trade conflicts which continue to smoulder all around the world are the biggest uncertainty factors for future development.  MEM industry companies are also indicating a lower level of optimism than they showed a year ago. Back then, 53 percent of them were expecting to see higher orders. This figure has dropped by 21 percentage points to 32 percent within the course of the year. According to the latest Swissmem survey, a relative majority of 45 percent are assuming that order levels from abroad will remain the same for 2019. Falling orders are expected by 23 percent of companies.  Access to global markets remains a success factor For years, the Swiss MEM industries have exported 80 percent of their products on average. The domestic market is thus far too small to guarantee the continued existence of the export companies and their jobs at their current size. Consequently, the companies are dependent upon access to global markets which is as free of discrimination as possible. This is particularly true for SMEs, which do not have the financial pull to expand their presence in the target markets at will. In the MEM industries, 98 percent of all companies are traditional SMEs. With the dismantling of tariff and non-tariff barriers to trade, these companies are gaining in competitiveness in their respective sales markets from their position in Switzerland. This strengthens Switzerland’s status as a business location and safeguards jobs in the export industry and in its countless supply businesses.  Due to the lack of growth stimuli in particular, it is incumbent upon Swiss foreign trade policy to move quickly to further broaden and deepen our network of free trade agreements. In this way, it can create new market opportunities. The focus is on the potential agreements with the United States and Mercosur, which should now be concluded as rapidly as possible and before other countries.  Institutional framework agreement is key The most pressing task, however, is to clarify our relationship with the EU, by far the most important of Switzerland’s sales markets. For this to happen, we need the institutional framework agreement. This places the bilateral approach on a footing that will be sustainable in the long term, and safeguards our privileged access to the EU single market. That was, is and will remain the primary goal of this agreement. Essentially, the present agreement is custom-made for Swiss needs and, in addition to safeguarding our market access, brings other important advantages for Switzerland: it creates greater legal certainty and respects Swiss sovereignty thanks to a functional dispute resolution mechanism, while also paving the way for new market access agreements. If the institutional framework agreement fails to materialize, the quality of Switzerland’s access to the EU single market will inevitably deteriorate: the existing market access agreements will – as announced – no longer be updated, meaning that economic relations will, within a few years, be in danger of reverting substantively to the level of the outdated free trade agreement of 1972. This will lead to a creeping loss of attractiveness for Switzerland as a place to do business, and it will lose out in terms of both jobs and prosperity. It is therefore crucial that policymakers, associations and social partners get behind this agreement, including the required clarifications.