New orders received in the MEM industries fell by 13.2% year-on-year in the first nine months of 2019. In the third quarter, the year-on-year decline amounted to 14.7%. The MEM industries have thus now posted falling order intake figures for five quarters in a row. It is noteworthy that the decline is almost exclusively attributable to export orders, which make up almost 80% of order volume. The decline in new orders is having more and more of an impact on sales performance. From January to September 2019, turnover fell by 3.7% compared with the previous year. In the third quarter of 2019, the decline amounted to 7.4%. The slump in sales has above all affected large corporations. One hypothesis to explain this is that, in an uncertain climate, the customers of the MEM industries make fewer major investments (e.g. purchases of new machinery) and focus more on maintaining their existing production resources.
MEM industries: fears prove true
The downward trend in the Swiss mechanical and electrical engineering industries (MEM industries) continued unabated in the third quarter of 2019. In the first nine months of the year, new orders received declined by 13.2%, turnover by 3.7%, and exports by 1.4%. The downturn in the MEM industries has been rapid and severe. In the space of 15 months order intake volumes have fallen by 27%. The situation will only get a chance to stabilize if economic activity in the main markets does not continue to slow and if no political and economic distortions arise globally. Moreover, the Swiss franc must not be allowed to appreciate rapidly against the euro. For this reason, the pressure on negative interest rates initiated by the banks is counterproductive.
So far, the negative trend has not had a knock-on effect on employment in the MEM industries. In the first half of the year this figure went up by 5,000 positions to 325,500 employees. However, over the course of the year there has been a marked reduction in capacity utilization, which had reached a very high 91.6% in the fourth quarter of 2018 before receding to 83.7% in the space of nine months. This figure is well below the long-term average of 86.4%. It is therefore not surprising that the number of firms using short-time work is now beginning to rise significantly.
Substantially lower exports in early-cycle subsectors
According to figures from the Swiss Customs Administration, goods exports by the MEM industries recorded a year-on-year decline of 1.4% in the first nine months of 2019. The total merchandise value was CHF 51 billion. Declines in goods exports were posted in the Asia (-3.5%) and EU (-1.7%) sales regions, while exports to the United States continued to rise (+4.1%). Looking at the individual product segments, metal industry exports fell by 5.8%, mechanical engineering exports by 4.7%, and electrical/electronics exports by 1.9%. Only precision instrument exports continued to grow, by 2.7%. The pressure was particularly intense for typical early-cycle product categories such as textile machinery.
Little sign of an imminent turnaround
The downturn in the MEM industries has been rapid and severe. In mid-2018 order intake was still at a comparatively very high level. In the space of 15 months it then experienced a 27% fall in volume. However, the hope remains that the situation will stabilize at a lower level over the course of the next 12 months. This hope is being nurtured by the fact that the decline in the PMI (Purchasing Managers’ Index, compiled by procure.ch and Credit Suisse) has recently come to a halt. For a more positive trend to set in, it is essential that economic activity in the main markets not cool off any further. In addition, no political or economic distortions can arise; currently there are no signs of this occurring. A further crucial factor is for the Swiss franc not to appreciate again vis-à-vis the euro.
The independence of the SNB is sacrosanct
In this context, it is less than helpful that pressure is being put on the Swiss National Bank (SNB) by banks to reverse the negative interest rate policy. In a recently published study, the banks conclude that the Swiss franc is no longer overvalued. However, the study is completely silent on the potential repercussions of discontinuing negative interest rates. In actual fact, the Swiss franc remains overvalued against the euro, and to the tune of over 8% if one takes as a basis the purchasing power parity figure of 1.19 per euro calculated by UBS. Moreover, it is plausible to assume that a discontinuation of negative interest rates would result in a further appreciation of the franc. The experiences of 2011 and 2015 show that this would bring painful real-economy consequences in its wake.
Even more serious is that the discussion on negative interest rates set off by the banks is ultimately undermining the independence of the SNB. This independence, however, is politically desirable and economically sensible. All historical experiences show that economies with independent central banks are better off financially. With their public criticism of the negative interest rates, banks are making monetary policy into the subject of a political debate and thus aiding and abetting the creeping over-politicization of the central bank. This strengthens political forces which view the SNB as a “self-service shop”. This is not in the interests of prosperity and jobs in this country.
A better policy environment is crucial
In this tricky economic situation, industrial companies face considerable challenges. But policymakers and administrators need to do their part too. Swissmem Director Stefan Brupbacher emphasizes: "We are not seeking subsidies. But we do need a better policy environment.” Currently causing concern is the sometimes very restrictive practice for authorizing short-time working in a few cantons. In addition, the waiting period for short-time work must be reduced to one day and the duration extended from 12 to 18 months. “The Swiss Confederation and the cantons have it within their power here to support companies and safeguard jobs with measures that will be effective in the short term”, says Stefan Brupbacher. Furthermore, companies must not be placed under additional burdens through an expansion of social welfare.
As a complement to this, the already negotiated free trade agreements with Indonesia and Mercosur need to be ratified quickly and the framework agreement with the EU finally wrapped up. “Although these measures would only have an effect in the medium term, they would bring a genuine improvement in the framework conditions for the MEM industries”, adds Brupbacher.