$Unique_ID{COW03559} $Pretitle{442} $Title{Switzerland Chapter 3. Construction} $Subtitle{} $Author{C. Frey} $Affiliation{Union Bank of Switzerland} $Subject{sector year construction growth sales income insurance swiss earnings increase} $Date{1990} $Log{} Country: Switzerland Book: Economic Trends in Switzerland 1989/90 Author: C. Frey Affiliation: Union Bank of Switzerland Date: 1990 Chapter 3. Construction Developments in 1989 Construction activity expanded by a real 5.9% in the first three quarters of 1989, based on national accounts data. Production rose by almost 8% in value terms, equivalent to a real increase of 2% after deduction of the 6% cost increase(Zurich building cost index), as reported by the Swiss Builders Association of 2,600 member firms. As of September, the building industry (excluding interior construction) employed 170,844 persons, or 2.8%fewer than in the previous year. While there were 8.8% fewer Swiss in construction jobs, the number of foreign workers increased slightly by 0.6%. Due to a tighter employment situation and the brisk pace of incoming orders, construction firms invested 18% more in plant and machinery compared to a year earlier. Productivity advanced by 8% and capacity utilization also outpaced the 1988 level. Civil engineering activity expanded by 8.2% to Sfr. 5.2 billion in the first nine months. Since production grew by only 4.2% during the same period, the orders backlog increased by 12.7%. Among the contracts providing work for an additional 9 months are some larger federal railway and highway projects. From January to September, incoming contracts for public works expanded by 7.2% and construction activity by 9.8%. Engineering costs went up by 4%, a below-average figure for the construction industry. By the end of the third quarter, general construction had expanded by 1.9% to Sfr. 8.8 billion. Orders for apartments increased by 5.3%, while industrial and trade building contracts dropped by 1.1%. The volume of planned new and enlarged buildings rose by 41.6% beyond the year-earlier mark, despite some decline for new contracts. Industrial and trade building production rose by 10.7% and apartments by 7.3%. Real growth for general construction, after a 6% adjustment for rising costs (Zurich apartment construction cost index), amounted to 3.4% over the previous year. In October, the backlog of orders for industrial and trade building was 4.5% higher over 1988, while orders for apartments were 10.5% higher. Construction costs were kept in line with rises in the general price level, thanks to the good construction environment; earnings also improved. Due to greater outlays for plant and machinery, capacity and productivity advanced further. The orders backlog, as of October 1989, exceeded the previous-year level for all subsectors of interior work (sheet-metal work, heating and plumbing, electrical installations +7%, cabinet-making +15%, metal construction +6%, painting and plastering +11%). Employment rose 4% in electrical installations and 2% in the other subsectors. Interior work costs rose similarly to construction costs in general. In metal work (+11%) and elevator construction (+7%), costs advanced at a faster pace, while cabinet-making (+3.4%), floor and wall covering, painting and plastering costs lagged somewhat. For all interior work, earnings were higher. According to third-quarter figures, incoming orders expanded the backlog of architectural contracts by 15%, structural engineering by 7% and civil engineering by 10% over the previous year. Fees for architects advanced by 4.8%, for engineers by 3.1% over the prior year, according to the Zurich building cost index of October 1989. Although stronger than a year earlier, earnings grew at a slower pace compared to work volume. Shortages of qualified personnel induced architectural and engineering firms to invest more in computers and software for drafting and administrative tasks. Outlook for 1990 Some easing of the construction boom is forecast for 1990, replaced by more moderate growth. In the process, rising interest rates play an important role. From mid-1988 to early 1990, the cost of construction credit rose from 4 3/4% to 7 1/4% and first mortgages from 5% to 7%. Based on experience and with other economic factors unchanged, it appears certain that a decline is in store for construction investment growth of around 1% - 2% from mid-1989 up to the end of 1990. Also contributing to the slowdown will be the more sluggish growth of the economy in general. According to third-quarter figures, from 1988 to 1989 the annual growth of orders backlog in general construction dropped from +23% to +9%. On the other hand, new building credit, as of October 1989 up 14.3% over 1988, would indicate that construction is still going to prosper. We estimate that overall construction activity could increase by a real 2.5% in 1990. Construction costs could be about 3% higher. Construction firms are planning to keep employment at present levels and to expand plant and machinery only moderately in 1990. Civil engineering firms expect earnings to stagnate in 1990 due to only slightly improved sales and declining costs. Although a few government-financed projects are in progress, no expansions are planned for employment or plant and machinery. With the occupancy level at 0.4%, its lowest point since the early 1970s, the steady demand for apartments could stimulate apartment construction in 1990. Rising interest rates and costly building land in central locations, on the other hand, reduced by 3.9% the number of building permits issued for apartments in towns of over 5,000 inhabitants, compared to the previous year. The demand for industrial and trade buildings is likely to be stronger, so that general construction could gain overall. Construction costs that will lag behind the general price level are expected to bring earnings growth to a standstill. In 1990 interior work should profit from the building boom of the prior year and, along with planning, achieve the most significant sales increase of the construction industry. With only slightly rising costs, earnings could again expand, although less strongly than in 1989. Investment will again outpace the previous year's level. Architectural and engineering firms expect slower sales growth in 1990 although costs should gain slightly. The present difficulties surrounding personnel can probably be resolved by adding staff members and increasing investment. R. Enz Retail Trade Development 1989 and Outlook 1990 for the Entire Sector Retail trade employed some 300'000 people or almost 16% of all employed in the service sector in 1989. Not including automobiles, retail trade sales were somewhere between Sfr. 65 and 70 million. An economically dependent sector, retail trade profited from the continued positive consumer trend and from an increase in income of about 6%. In terms of value sales were up by 4% in 1989. However, due to a strong increase in consumer prices, sales were only up a real 1.5%. The number of employees in retail trade grew by a good 4%. Concentration tendencies will continue. More money was invested to increase the level of competitiveness. In 1990 the retail industry should be served well by the good mood of the consumer as well as by a wage increase of about 6%. Most of those surveyed within the industry expect consumers to benefit from a healthy economy. As is the case in all sectors, positive sales expectations are based on higher prices. Most of those surveyed expected a stable Swiss franc and a decrease in import prices. In any case the majority of those surveyed ruled out the possibility of higher purchase prices so the profit margin should at least remain constant if not increase marginally. On the whole, profit expectations will be just below the average of the entire sector. Invesment should increase as employment numbers begin to stabilize. Development 1989 and Outlook 1990 in the Subsectors The participants in our survey from the sector of food, beverages and tobacco held a more positive view of business in their segment during 1989 than they did in overall retail trade. Most of those questioned reported higher sales than in the previous year. Developments were especially good during the Christmas shopping season. Purchase prices grew just under average at about 2.5%. The earnings situation was, however, somewhat under average compared to the entire industry. Participants reported lower profits than last year. Most of those surveyed plan heavier investment. Even the smaller retailers will invest in order to remain more competitive. Expected earnings and profits for 1990 are above the average for the entire sector. According to our survey textiles, apparel and shoes developed below average in 1989. Nominal growth of 1.5-2% was reported. Sales of knitwear and knitted goods, hats, caps and girls' and women's wear were considerably lower. In contrast, shoes sold very well during 1989. Survey participants are more skeptical about growth in this sector during 1990 than in the overall industry but do expect higher sales and profits. Higher domestic demand is also expected. In the sale of sporting goods the majority of our survey respondents were satisfied by the results of 1989 even though sales and, above all, earnings were under the retail trade industry average. Winter 1988/1989 was very bad for sporting good sales. On account of the weather and the terrible ski conditions the market for Nordic and Alpine ski articles was especially poor. The summer months were able to retrieve a small amount of business. Based on the disappointing winter of 1989 the Christmas season has been a failure. The sales and earnings situation for 1990 does not look good and should fall far below the sector average. The sporting goods industry is planning a slight increase in investment although some, mostly small, sporting goods retailers plan less investment than last year. Most of those answering our survey in the furniture and household items sector believe the 1989 business year was poorer than the overall industry average. The increase in sales, approximately 4.5%, was viewed quite positively. The Christmas season was especially good. Sales prices for furniture and household items rose 3% in 1989. The majority of those answering our survey found earnings in the industry at least as good as retail trade overall. The majority of participants believe that sales and profits in this sector will outperform the industry average in 1990. Domestic and foreign demand and purchase prices should remain the same and the Swiss franc should maintain stability. If a slowdown in construction were to materialize this sector would feel the effects strongly. Automobile dealers were very happy with the business and earnings situation in 1989 which was above the sector average. About 330'000 new and 680'000 used automobiles were sold. Sales were up approximately 10% partly due to higher prices. Most of those responding to our survey expect automobile sales to be in line with the boom of the previous year. In relation to earnings most of the expectations are noticeably lower than the overall sector average due to the belief that automobile prices are still too low. Most respondents in this sector hope for a low Swiss franc rate which would increase import prices and allow for a reduction in the margin. Those responding from the sector of photographic equipment saw 1989 as having a more positive earnings and business result than the industry average. Most of the respondents said that sales developed quite favorably although profit results were lower. In 1990 the industry expects to see higher sales and profits although profits will most likely be below the sector average. Of those that responded in the home electronics sector, most said that sales development was about the same as for the entire industry. The earnings situation, however, was not satisfactory at all. Profits fell according to the majority of responses. An exception to this trend was recorded by the sound carrier, which, according to those who answered our survey, posted much higher profits than last year. Sales prices rose modestly due to competition. Most of the respondents expect stable prices in 1990 which translates into positive sales and profit possibilities. The degree of investment will be smaller than last year. E. Messner Tourist Trade Developments in 1989 In 1989 approximately 220,000 persons were employed in the Swiss tourist trade. The active balance of tourism is estimated positively also for 1989. (Figures for 1988 show that income from tourism in Switzerland amounted to Sfr. 10.4 billion, compared to expenditures of Sfr. 8.8 billion spent by Swiss traveling abroad.) Inasmuch as outlays by Swiss tourists abroad have increased sharply over the past few years, however, the positive balance of tourism is expected to deteriorate somewhat. Tourism is Switzerland's third most important source of foreign currency, ranking behind machinery and the chemical industry. The business trend in all subsectors of tourism was satisfactory in 1989 and kept pace with the other sectors of the economy. Sales and earnings were livelier, with hotels in particular improving the fairly modest results of the previous year. A weaker Swiss franc, the strong economy and favorable weather conditions all contributed to the positive balance of tourism. This last factor influenced especially tourism in the mountain and lake regions. The Swiss hotel trade achieved record results in 1989. The number of overnight stays made strong gains in the first eleven months. With close to 33.4 million overnight stays from January to November, Swiss hotels enjoyed a 5% increase over the previous year. This was the second best result of the 1980s. An all-time high was registered by domestic demand, up 6% over the average of the years 1979 to 1988. Apart from fair weather conditions, the gain was also the result of longer summer vacations in a few Swiss cantons. Hotel guests from abroad increased by 7% over the previous year and by 4% compared to the 1979-1988 average. On the upsurge particularly were the number of guests from Italy (+14%), U.S.A. (+9%) and Great Britain (+8%). Guests from West Germany, at 20% the most important group of foreign tourists, outnumbered by 4% the figure for 1988. The number of operating hotels declined by 1.3% to a total of 6,830, whereby from January to September the average rate of occupancy rose by 2.7% to 39.4%. Earnings, on the other hand, improved only slightly. Personnel was increased minimally over the previous year, by September 1989 reaching 74,800 persons. For that time of year, this was the highest employment figure ever registered. For restaurants, sales and earnings improved over the previous year. By the third quarter of 1989 sales had gained by approximately 5-7% above the prior year. Larger establishments profited especially from the brisker pace of business. The employment situation remained difficult. The stand of personnel declined slightly in 1989. Prices increased in line with the averages for the entire sector. In November the cost of a full-course meal was up 4.2% over the previous year, and beverages were up 5.3%. Travel agencies, numbering about 1,400, reported a brisk pace of business. The strong economic climate and rising available income have turned the Swiss into ardent travelers. In 1988 the Swiss spent Fr. 8.8 billion on holiday traveling, already 12% more than in the previous year. Approximately one-fifth of the seven million trips abroad were booked through a travel agent. In 1989 travel to far-off places was especially in demand, since kilometer-wise it became relatively cheap compared to European travel. This trend benefited the travel agents, whose services are more requested for longer distances. At the same time, the familiar destinations seem to inspire more self-reliance and self-made travel arrangements. The strongest growth rates were enjoyed by vacation destinations in the Far East and South America. Bookings for U.S.A. travel were on a par with the previous year, after favorable exchange rates had already induced substantial growth in 1988. Europe was still the most popular destination, led by the Mediterranean countries. Earnings improved only slightly, however, despite more substantial price increases for the travel agencies compared to other subsectors. There was fairly strong pressure on costs, especially in the smaller and medium-size firms (almost 70% of the agencies) due to personnel problems and larger outlays for internal training and for communication systems due to new electronic means of booking and distribution. The number of personnel remained unchanged over the previous year. Outlook for 1990 The hotel trade is looking forward to a fairly prosperous 1990, although neither sales nor earnings are expected to grow at the strong rates of 1989. A rise in the demand from abroad is predicted by twice as many hotels as those predicting any rise in Swiss demand. According to the UBS survey conducted in the autumn of 1989, tourist office managers in the major holiday centers were predicting more guests or at least equal numbers in the 1989/90 winter season over the previous November-to-April period. None of the holiday centers forecasted a decline. The restaurant trade expects some slight gains for both sales and earnings. New regulations in the collective labor agreement are expected to exert pressure on costs also in 1990. Approximately three-fourths of the restaurants surveyed expect rising purchase prices. The shortage of personnel will remain acute. Restaurants in the holiday resorts will be the only ones to benefit from easier restrictions on seasonal foreign workers. Most of the restaurants surveyed expected a stagnating or declining supply of personnel. Investments were estimated at approximately the same levels of growth as in 1989. The travel agencies view 1990 in a positive light, within the framework of the favorable outlook for the economy and employment. While the surveyed firms expect some further weaking of the Swiss franc, they felt it should have little or no effect on the Swiss who plan to travel abroad. Travel companies anticipate strong growth for sales and some slight improvement in the earnings picture. Swiss travel agencies intend to increase investments this year. Some agencies are planning to expand their office network in the rural areas. In view of the approaching European internal market and the danger of losing customers to neighboring EC countries, the 1,400 travel agencies in Switzerland are under pressure to improve their competitiveness. The trend towards merger is growing, since larger firms can cut costs and offer better bargains. Also stronger is the tendency to look for a market niche, especially on the part of the smaller and medium-sized firms. Irene Meier Insurance At the beginning of 1989, 26 life insurance companies, 85 accident and property insurers, and 13 reinsurance companies were in operation on the Swiss insurance market, with 23 of the total being foreign firms. Business abroad accounted for 47% of total premium income, which came to Fr. 45.4 billion in 1988. Including subsidiaries abroad, which generated the equivalent of Fr. 18 billion, the foreign share of Swiss insurance companies came to as much as 64% whereby EC operations achieved more importance at nearly 40% than the domestic market at just under 36%. In this light, the progress made by the EC internal market program assumes major significance for Swiss insurers. An important milestone for Switzerland's insurance companies with regard to their chances in the EC market was the insurance agreement concluded on October 10, 1989, between Switzerland and the European Community. This agreement is expected to give Swiss non-life companies leeway to establish branch offices in the EC and vice-versa as of 1993. Through acquisitions, Swiss insurers not only strengthened their positions in Europe but also in the United States. In March 1989, a new era began for property insurers in that the recommendations made by the cartel commission regarding tariffs and insurance terms were translated into administrative orders. The companies that responded to our survey are of the opinion that the resultant increase in competition will have an adverse effect on the income of property insurers and thus on the entire industry. Development in 1989 In line with the generally favorable economic trends at home and abroad and the continued above-average growth in demand for insurance, the volume of business in all three of the main sectors of operation (life, non-life and reinsurance) expanded further. According to the 29 companies that took part in our survey and which employ roughly one-third of all the persons working in the insurance industry, the volume of premiums in the life insurance sector showed the slowest rate of growth. However, trends varied greatly from company to company and did not match the outstanding results of the preceding year (+16,8% to Fr. 13.2 billion in domestic operations). Although the slowdown in group insurance that followed the increase prompted in 1988 by the federal pension law matched expectations, the pronounced gain in interest rates on the money and capital markets led to a downturn in individual policies. Premium rates, unchanged since 1980, also had a braking effect on the overall development. In the non-life sector, where 1988 domestic premium income rose by 6.6% to Fr. 9.7 billion, trends in 1989 were differentiated. The motor vehicle insurance sector reported the strongest growth, which can be attributed to the boom in auto sales and higher premium rates. Accident and health insurance operations developed largely in conformity with premium rates that had been adjusted to medical costs. Despite competition-induced premium reductions, volume in the transport insurance sector also expanded, whereas the market for general third-party liability insurance stagnated. The reinsurance sector, which is strongly international in structure, again recorded moderate growth, although this was due partly to exchange rate factors. The downward trend in demand for the services of reinsurers was countered by stepped-up diversification into direct insuring and other services. With losses running at a normal level, underwriting results improved again on the whole. The overall income situation in 1989 is believed to have been to be positive also, whereby the general rise in costs was offset by the sharp upturn in investment income. Despite the strain on the labor market, the number of personnel could be raised slightly. At the same time, investment activity was strengthened, especially in the direct non-life sector. Outlook for 1990 A somewhat more differentiated trend is indicated for the 1990 insurance year. The companies participating in our survey expect a general rise in premium income but a slowdown in expansion in reinsurance and only a slight acceleration in the property insurance sector. In the life insurance sector, the optimistic prognoses are based primarily on the economic situation, which despite a slight softening is still positive, and the related step-up in demand for insurance coverage. On the other hand, uncertainties cloud the outlook for individual policies, as the continued high level of interest rates is dissuading customers from paying in single premiums. The first revision of rates for individual annuity policies in ten years should nevertheless bring in additional premium income. Business volume in group insurance will profit from the stronger growth of wages, which will be accompanied, however, by reduced rates under the mandatory occupational pension plan system. In the various sectors of property insurance the downturn in rates due to the lack of cartel agreements should be offset by stronger volume growth. The Federal Office for Private Insurance intends, however, to keep the otherwise welcome competition among the individual companies within boundaries to prevent a disastrous premium rate battle and a possible loss-leader policy. Instead of this, insurance services are expected to be more carefully tailored to the specific needs of the various customer categories. The accident and health insurance sector predicts largely unaltered trends. Any effects exerted on private health insurance by the Health Maintenance Organization (HMO) and bonus concept - which went into effect on a trial basis at the beginning of 1990 - cannot yet be quantified but are likely to prove minor for the present. Assuming that losses will be average, the industry expects a slight deterioration in its income picture in 1990. This will be mainly the fault of the property insurers, which are likely to feel the negative impact of the decline in premium rates. Life insurers, however, are somewhat more optimistic than in 1989 thanks to the expected growth in volume and despite the general rise in costs. This sector also anticipates an increase in investment income, while reinsurers not only expect positive investment results but also income gains from their diversified fields of operation. Personnel increases are planned whenever possible, while corporate spending patterns are likely to remain largely unaltered. C. Frey Banking Development in 1989 Against a backdrop of generally good economic development, most of the banks reported very positive business results. The continued vitality of Switzerland's economy as well as the good economic performance in other countries gave a strong boost to government and corporate demand for financing, which together with mounting inflation produced a marked increase in the banks' volume of lendings. The Swiss National Bank's very restrictive, anti-inflationary monetary policy led, however, to a pronounced rise in interest rates, which caused a number of shifts in emphasis on the liabilities side of the bank's balance sheets and put a squeeze on profit margins. Nevertheless, in view of very favorable income results from off-balance-sheet operations and continued stringent cost controls, the banks reported a further improvement in profits. The aggregate assets of the 358 banks reporting monthly rose by 6.3% to Fr. 978.1 billion in the first nine months of 1989, which very nearly matched the 6.2% growth rate of the same period of 1988. While the reduction of liquid positions and money market paper due to the new liquidity regulations was the cause of the pressure on balance sheet growth in 1988, the decline in balances due from banks was the reason for the below-average balance sheet development in 1989. Since this applied only to the big banks, their balance sheet totals displayed a smaller advance (5.2%) than those of the cantonal banks (6.6%), regional banks (6.8%) and foreign banks (6.7%). The volume of lendings, which is a better indicator of business growth, rose by a far more hefty 11.8%, with commercial loans increasing by 14.3% and mortgage loans by 9.3%. In these two important credit sectors, the big banks reported above-average advances of 16.9% and 10.5%, respectively. On the liabilities side of the ledger, balances due to banks climbed by 5.5% and deposits by 6.2%. However, the steep upturn in interest rates on the money and capital markets, which was reflected to varying degrees in the different categories of deposits, triggered shifts in funds. Time deposits rose by 25.3%, whereas demand deposits contracted by 1.3% and savings and deposit accounts by 9.8%. The resultant gap in the medium-range sector could be closed only partially by the increase in medium-term notes (+6.3%) and bonds (+6.0%). Since the banks' refinancing costs moved up sharply and the two adjustments of mortgage rates only partly compensated for the increase, interest margins narrowed substantially. However, this could be offset by the larger volumes, with the result that the majority of banks will probably show a slight gain in net interest income over 1988. The improvement in the overall income situation can be attributed chiefly to the growth in off-balance-sheet income. Due to increased trading and higher equity prices, considerably higher commission income was recorded in securities trading. Good results were also achieved in portfolio management, foreign exchange and precious metals trading and in commissions derived from international commercial operations. The only decline came in income from capital market operations as a consequence of the smaller volume of issues placed by foreign borrowers. Despite the further rise in investment, net income in the banking sector most likely exceeded the preceding year's figure in light of the minor increase in personnel and continued strict cost controls. There were large differences in income results, however, depending on the type of business stressed by the individual banks. Outlook for 1990 The banking environment for 1990 does not appear to be quite as favorable. With the slowdown in business, which is being observed mainly in the construction sector - the economy's demand for financing will taper off. This will probably be bridged over only in part by the nominally higher credit volume resulting from the initial increase in inflation. A leveling off in growth is also expected in international commercial operations. At the same time, an easing of the refinancing difficulties is not in sight. The Swiss National Bank will adhere to its restrictive policy at least until the middle of the year, which means the level of interest rates will rise further for the time being and begin to edge off only in the second part of the year. In view of the resultant inverse interest rate structure, there will be a continued shift out of medium-term deposits into higher yielding short-term investments. Despite further, unavoidable increases in the interest rates paid on the different types of savings accounts and thus in mortgage rates as well, the interest margin will remain at the depressed level of 1989 and net interest income will go up in tandem with the slower growth in volume. The trends in the other important income components depends on a number of factors, whose development is difficult to assess. Results from securities trading will be affected to a great extent by the mood of the stock market, which, despite the contraction of the construction boom, is likely to continue to profit from expectations of lower interest rates and to receive additional support from heavier institutional investment. In foreign exchange trading, there is little likelihood of smaller rate fluctuations on continued intact earnings opportunities. It will be difficult to match 1989 growth rates in both sectors. Due to higher personnel costs because of inflation and further heavy investment requirements, 1990 income statements are apt to show a slowdown in growth. This scenario was largely confirmed by our survey, in which 86 financial institutions employing a good 30% of the banking personnel participated. Based on favorable 1989 results, growth in balance sheets and income is expected to taper off strongly in 1990. Stagnation in net interest income is even likely to follow the below-average gain already recorded in 1989. Difficulties in refinancing were cited as constituting the most serious problem forecast for 1990, whereas positive trends are hoped for in off-balance-sheet operations. Personnel rolls at most of the banks queried will remain more or less stabile as in 1989, but nearly half of the correspondents still foresee a small increase. The investment cycle continues, particularly in the EDP sector, where even stronger growth in investment is planned for 1990 than in 1989. At the beginning of 1990, new regulations pertaining to capital and reserves at banks went into effect. They include larger provisions for off-balance-sheet operations and an easing of the provisions required for various balance sheet items. At the same time, the share of subordinated loans that may be considered as capital resources was raised from 10% to 25%. Although the new rates are still considerably above the minimum requirements set by the Bank for International Settlements (BIS) and the European Community, the revision may be viewed as a satisfactory alignment with international standards. C. Frey