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Global Economic Outlook
Switzerland: Q1 2010 Outlook
By Katharina Jungen
- Switzerland’s recovery will continue in 2010, supported by rising exports and a recovering financial sector.
- Rising unemployment and accelerating inflation will keep domestic demand in check.
- Interest rate hikes aren’t likely until late 2010 due to the uncertain economic outlook.
Following four quarters of negative growth, the Swiss economy emerged from recession in Q3 2009, posting 0.3% q/q growth on the back of robust private and public consumption, rebounding exports and resilient building investment. Due to the absence of major imbalances in the economy, Switzerland experienced a relatively mild recession compared to other industrialized countries. However, in Q3 2009 Swiss GDP was still 1.3% y/y below the previous year’s level. In the coming months, the external and financial sectors are likely to gain in importance, while private consumption and construction activity are set to become more subdued after largely stabilizing the economy in 2009. The current rebound in economic activity is not yet strong enough to eliminate substantial excess capacity, and as a result unemployment will pick up significantly. Fading stimulus packages, accelerating inflation and ongoing global structural problems will further limit Switzerland’s economic potential in 2010 thereby precluding a swift, v-shaped recovery characterized by above-trend growth rates. RGE expects the Swiss economy to register moderate growth of 1.0% in 2010, following a contraction of 1.6% in 2009. The growth momentum is to set to accelerate in 2011 once the turnaround in the labor market creates the conditions for more sustainable growth going forward.
The External Sector Will Drive Growth in 2010
For the first time since the beginning of the crisis, exports registered positive growth in Q3 2009 on the back of robust cross-border sales of pharmaceuticals and strong demand for Swiss exports from Asia. Still, relative to the sharp contraction in exports that started in Q3 2008, the current upturn is at best moderate and export levels remain low. Moreover, the strong Swiss franc will weigh on Swiss exports’ competitiveness. Exports will rise gradually, in line with global trade dynamics; a strong rebound, however, isn’t likely before 2011. Industrial production levels further recovered in Q3 2009, albeit at a low level, expanding by 3.4% q/q compared to the previous quarter. While business surveys indicate further improvements to take place in the coming months, signs of weaknesses are appearing. The Swiss manufacturing PMI fell unexpectedly in December but managed to remain above the key-50 threshold, which separates growth from contraction, for the fifth consecutive month. Switzerland’s leading KOF economic growth barometer rose to 1.68 points in December, indicating that the year-on-year growth rate of Swiss GDP should remain positive. However, the strong increases of recent months started to level off in late 2009 with the indicator moving largely sideways. While order levels and, in particular, new orders have shown signs of improvements in Q3 2009, both indicators are still well below their 2008 levels. Concerned about the sustainability of the current upturn in order activity, firms are cautious on the purchasing side, according to the PMI survey. Despite staging a strong comeback in Q3 2009, investment will remain subdued throughout 2010 as a result of the ongoing slack in the economy. With capacity utilization rates remaining at very low levels, and in light of the ongoing uncertainty surrounding the economic recovery, firms will not raise their investment targets significantly in the next 12 months. Hence, with the Swiss economy showing at best signs of a moderate recovery, an economic upturn will not be seen before early 2011.
The Outlook for Private Consumption Remains Bleak
In contrast to many other industrialized economies, Swiss private consumption proved remarkably robust during the crisis, expanding by 0.6% q/q in Q3 2009 and even registering positive growth on an annual level. Moreover, retail sales rose in Q3 2009 and consumer confidence improved substantially, though thus far it has failed to rise above its historical average. Still, the outlook for private consumption remains bleak. In 2010, households are likely to curb spending due to rising unemployment, falling income expectations and reaccelerating consumer prices. The consumer confidence survey shows that respondents remain especially concerned about job security, given the continuous rise in the unemployment rate. With the current growth momentum not yet strong enough to eliminate the slack in the economy, unemployment is set to rise from 4.4% in December 2009 to more than 5% by the end of 2010. The labor market will only turn around in early 2011, once capacity levels are recovering. Only the strong financial position of Swiss households will allow for a further rise in private consumption, albeit at a much slower rate than in recent quarters. Once the employment rate starts to rise in 2011, private consumption will stage a comeback.
When Will the SNB Start to Hike Interest Rates?
Due to the ongoing uncertainty surrounding the economic recovery, the SNB chose to maintain its expansionary monetary policy, keeping its target range for three-month Libor at 0%-0.75%, with a target rate of 0.25% at its last quarterly meeting in December 2009. The Swiss central bank also reiterated its commitment to prevent any excessive appreciation of the Swiss franc (CHF) against the EUR and largely stuck to its inflation forecast from September 2009. Furthermore, the SNB announced the discontinuation of its relatively small bond purchase program, worth 3 billion Swiss francs, which had not been used since mid-September 2009. In line with RGE’s October forecast, a rise in interest rates is unlikely before September 2010, considering the ongoing fragility of the economic recovery. In December 2009, the Swiss consumer price index posted a 0.3% y/y gain, its first annual rise since February 2009. Rising energy prices will further push up headline inflation in the coming months. This effect will be dampened by weakening core inflation, a result of substantial excess capacity, which will put downward pressure on consumer prices. The possibility remains for core inflation to briefly turn negative in the coming months. In 2009, Swiss annual consumer prices declined 0.5%, their first full-year contraction since 1959, in line with RGE’s October forecast. For the current year, RGE expects Swiss consumer prices to reaccelerate moderately to 0.5%.
The Outlook for the Banking Sector is Improving
Switzerland’s banking sector is slowly recovering from the financial crisis and the UBS scandal that brought significant changes to Swiss bank secrecy. Hence, in the coming quarters, the financial sector’s contribution to Switzerland economic recovery will increase in importance. Many Swiss banks reported improved earnings and net inflows in Q3 2009, with the notable exception of UBS where substantial funds were withdrawn in particular from the Wealth Management Americas. Still, in an effort to further stabilize the financial system, the OECD recently called on Switzerland’s major banks to further reduce risk and to raise additional capital. With regard to banking secrecy, in 2010 the Swiss parliament will ratify the revisions to the double taxation treaties it negotiated with several countries. Even if both chambers approve the changes, the risk remains for opponents to call a referendum that will let the Swiss people decide on the matter.