“There is a general lack of economic stimulus”
The Swiss economy is not performing well at the moment. The KOF Business Situation Indicator for the Swiss private sector, which is calculated on the basis of the KOF Business Tendency Surveys, fell in January. Exports are weakening owing to the lack of momentum in Europe, while the potential for exporters’ business is being assessed more cautiously. Although the domestic economy is relatively robust in some areas, how long can it continue to decouple from the negative trend in Europe?
Executive summary
The outlook for the manufacturing sector appears fairly bleak. The Business Situation Indicator here has fallen for the second month in a row, and companies are very uncertain about the future. They are planning to expand their production much more cautiously than before and are increasingly looking to cut jobs.
In the project engineering and construction sectors, which are both associated with building activity, the Business Situation Indicator fell for the second month in a row.
The indicator also fell in the financial and insurance sectors and in other services. By contrast, firms in the retail, wholesale and hospitality sectors reported an improvement in their business.
“The domestic economy is performing well in some areas, but exports are weakening. There is a general lack of economic stimulus,” is how Klaus Abberger, head of the Business Tendency Surveys section at KOF, summarises the situation. “The weakness of the European economy, especially in Germany and France, is clouding the outlook for Swiss exporters.” The question now is how long the domestic economy will be able to decouple from the negative trend in Europe. However, there are glimmers of hope that the economy will pick up again over the course of this year. “Investment has been so weak recently that a cyclical approach should soon give rise to replacement investment.”
The next six months
The business outlook over the next six months is more cautious than before in the majority of sectors. In addition to their current business situation, the prospects for project engineering firms, the construction industry, financial and insurance service providers as well as other services have also deteriorated. The outlook is also less optimistic than before in the hospitality industry, which reported a more encouraging business situation in January. Forecasts in manufacturing have changed only slightly compared with the previous month. Wholesalers are increasingly expecting the upturn to continue.
Skilled labour shortages: yes or no
Manufacturing industry and other services are less likely to be hampered by labour shortages, while wage forecasts are unchanged overall since the autumn. Complaints about a shortage of suitable workers in other services have once again eased significantly. This problem is also becoming slightly less acute in the wholesale and manufacturing sectors. In contrast, there are growing challenges facing construction and project engineering. “The cyclical shortage of skilled labour is easing because the economy has weakened. But the structural shortage of such labour – which will persist owing to demographic change, for example – remains,” says Klaus Abberger.
Rising or falling wages?
Firms’ forecasts of wage levels over the next twelve months have remained virtually unchanged since last autumn. Gross salaries are expected to rise by 1.5 per cent. Firms reckon that pay growth is likely to be below average in the retail sector and above average in the hospitality industry.
“Investment has been so weak recently that a cyclical approach should soon give rise to replacement investment.”Klaus Abberger, head of the Business Tendency Surveys section at KOF
Manufacturing
The current business situation and expectations in manufacturing industry are tending to deteriorate; demand is weakening and uncertainty is high among firms. Having eased in the summer and autumn of last year, the Business Situation Indicator for the manufacturing sector has now fallen for the second month in a row. Incoming orders are not picking up and order books are dwindling. Overall, a good 60 per cent of manufacturing companies are complaining of insufficient demand for their products. Capacity utilisation of machinery and equipment has fallen – particularly in the chemicals and pharmaceuticals sector. The earnings situation is less encouraging than it was, and firms are increasingly reporting financial restrictions. Companies are now more sceptical about developments in the near future than they were previously. “We are hearing from many firms that political and economic uncertainty has increased. This is definitely partly due to the election of Donald Trump as US President. After all, America is our most important trading partner,” stresses Abberger. As far as the levels of demand over the next three months are concerned, respondents have noticeably revised their expectations downwards. Production schedules also envisage less expansion. Against the backdrop of these gloomy forecasts, companies are increasingly planning to reduce their staffing levels. Surplus labour, which has been retained in the past, seems more likely to be shed now. “We economic observers have been waiting for this industry to pick up for some time now. But even though there have been initial signs of this in the past, they have never materialised. The longer this slump lasts, the more likely it is that it will impact on the labour market,” concludes Abberger.
Project engineering and construction
The business situation among project engineering firms and in the construction industry is deteriorating again and uncertainty about future developments is growing. Business in the project engineering and construction sectors, which are both linked to building activity, deteriorated in January – only slightly in project engineering but more sharply in construction. This is the second consecutive decline in the Business Situation Indicator in both cases. Uncertainty about the future is growing in both sectors, with survey respondents finding it more difficult to assess future developments than they did previously. Satisfaction with existing order books is decreasing in the construction industry. Capacity utilisation of vehicles, machinery and equipment is falling significantly and is clearly below average over the medium term. Companies in the construction industry are no longer planning to expand their production overall on balance, with plans for building construction in particular being revised sharply downwards. Although firms still frequently complain about labour shortages, they are looking for additional staff less often than they did previously. Although the business situation in the project engineering sector is worsening, demand for these firms’ services has recently been stable. Nevertheless, these businesses have expanded their service provision more slowly than they did before. Viewing trends over the next three months, companies are expecting to see a more modest increase in demand and a more cautious expansion of services than they did previously. Nevertheless, firms are more likely to be affected by labour shortages than by a lack of demand.
Retail and wholesale
Although business is improving in both the retail and wholesale sectors, the outlook in retail is deteriorating, while wholesale is becoming more upbeat. The business situation in the retail sector continues to brighten, with the relevant indicator rising for the third month in a row. However, retailers are concerned about the future. They are expecting less sales growth than before and are increasingly being forced to cut their prices. Confidence is also evaporating from the business outlook for the next six months. Overall, expectations are giving rise to fears that the upturn in the business situation could soon weaken. Business activity in wholesale remains almost unchanged and challenging. This is primarily due to the dismal situation in the wholesale trade in producer goods. By contrast, business in the wholesaling of consumer goods continues to recover. In the latter, sales of goods are gradually stabilising, whereas in the former they are continuing to decline. Delivery times in both segments are unlikely to change much in the near future. Wholesalers are hoping for a slight upturn in demand over the next three months, with prices remaining virtually stable overall.
Hospitality industry
The business situation in the hospitality industry is improving and demand is likely to remain more or less stable in the near future. The Business Situation Indicator for hospitality rose in January after having been on a continuous downward trend throughout 2024. Business in the accommodation sector in particular brightened but also improved very slightly in food services. Business activity is excellent in the mountain regions and is slightly above average in the lakes and urban areas. Room occupancy in the accommodation sector has risen significantly and its earnings situation is faring better than it did previously. The number of overnight stays by both foreign and domestic guests is more encouraging than it was. Reservations for the current quarter suggest a slight increase in overnight stays in the mountain regions and in major towns and cities. Little change in demand is expected in the food-services sector. Although a large proportion of the responding food-service providers feel that they are being hit by insufficient demand, this share has fallen for the first time in two years. In contrast to accommodation establishments, food-service businesses are still trying to impose price increases.
Financial sectors
Business activity in the financial sectors is cooling slightly, with lending and deposit-taking weighing on banks. Following two rises in the preceding months, the Business Situation Indicator for the financial and insurance services sector suffered a setback in January. Their earnings have come under slightly more pressure recently. Lending and deposit-taking in particular are having a negative impact on banks' profitability. In contrast, fees and commissions as well as trading operations continue to perform well, although the trading business is no longer as strong as it was previously. The volume of assets under management is growing significantly. The creditworthiness of banks’ corporate clients was no longer deteriorating. Insurance companies increased the number of their insurance contracts less sharply than they had previously. Their earnings situation has continued to deteriorate. Insurers are becoming increasingly sceptical as to whether they will be able to match their net investment income from the same period last year during the current quarter.
Other service providers
The business situation of other service providers is coming under slight pressure, with the business outlook remaining positive, albeit not quite as much as previously. The Business Situation Indicator for the other services sector in January could not quite match the increase achieved in the previous quarter. Companies are still fairly optimistic about their business going forward. Their level of capacity utilisation has risen slightly on a seasonally adjusted basis. Capacity utilisation is high in personal services and has increased slightly in business-related services. In contrast, the corresponding rate has fallen in the transport sub-sector and particularly at information and communication companies. Capacity utilisation at information and communication firms is significantly lower than it was during the two years prior to the pandemic. Nevertheless, businesses in this sub-sector are increasingly expecting demand to pick up soon. Overall, the demand outlook for service firms has changed little compared with the previous quarter. Staffing levels are still considered to be too low. There are therefore plans to expand workforces, albeit not to the same extent as in 2022 and 2023. The problem of labour shortages is becoming less urgent and is being replaced by lack of demand as the new main obstacle.
The Business Situation Indicator in the KOF Business Cycle Clock is plotted against the KOF Economic Barometer (see chart G 5). The indicator reflects the current business situation, while the barometer is a leading indicator of changes in activity. The clock can be divided into quadrants. During the recovery phase the business situation is below average but growth prospects are above average. At the peak of the economic cycle the situation and prospects are both above average. During the slowdown phase the situation is above average and prospects are below average. At the bottom of the economic cycle the situation and outlook are both below average. Ideally the chart runs through the quadrants in a clockwise direction.
Survey
The results of the KOF Business Tendency Surveys from January 2025 include responses from around 4,500 firms from manufacturing, construction and the major service sectors. This equates to a response rate of around 60 per cent.
Become part of the survey group and enjoy special benefits. All information is available at https://kof.ethz.ch/en/surveys/business-tendency-surveys.html
Contacts
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