Cooling economy even in Switzerland - very nervous financial markets hold additional risks
Bern, 20.09.2011 - Economic trends and forecast from expert group Federal government’s economic forecast - Fall 2011*. The economic outlook for Switzerland has deteriorated for Switzerland over the past few months. An important factor is the unfavorable foreign trade conditions such as the significant slowing of the world economy along with the high valuation of the Swiss franc even after introduction of an exchange-rate floor to the euro. The negative impact on exports and company investments could sharply slow economic growth in Switzerland over the short term. The federal government’s expert group are therefore projecting GDP growth in 2012 to be 0.9% (after 1.9% for 2011). As a result of the economic weakness unemployment in the coming year may rise for the first time since 2009. Another risk for generating a worse economic outlook, with more recessionary tendencies, might be further upheavals on the financial markets resulting from further critical developments in the European debt crisis.
International economy
The prospects for the international economy have dimmed over the past few months. In July and August there was a general and further loss of confidence on the financial markets. These market upheavals resulted in part from the lack of convincing political solutions, so far, to the European public debt crisis. Even the real economic indicators were subject to these influences as the mood darkened among companies and consumers in many countries as well.
In particular the Eurozone the economic outlook is very uncertain over the coming quarters. In view of the latest downward trends among the most leading indicators there is even an increased risk of recession, even though modest growth for the Eurozone as a whole seems the more likely scenario for 2012. Even the growth engines like Germany appear to be facing a slowing economy due to diminished export prospects. Far graver are the problems facing the peripheral countries that suffer from high debt levels and weak competitiveness. Shortterm government austerity programs or tax increases will further slow these already weak economies. The USA appears less likely to suffer a recession as its economic indicators are currently less dire than those of the Eurozone. However, the US economy is still suffering from the lingering effects of the real estate crisis (deleveraging in the private sector with subdued consumer spending, continuing high unemployment, a suffering construction industry), which will continue to drag on growth.
Even developing countries (in particular in Asia but also Latin America and eastern Europe), which grew strongly over the last few years, are affected by the global slowdown. Restrictive monetary policies have been put in place in many emerging countries to prevent their economies from overheating. However, a strong downturn still seems unlikely in the most emerging economies and they will continue to be a supporting pillar of the world economy despite lower growth rates in 2012 as well. In the event of any negative developments, monetary and fiscal policy in many emerging economies have more scope (to counter shocks to aggregate demand) than many industrialized countries.
Economic forecast for Switzerland
In the first half of 2011, Swiss economic growth remained solid despite the first signs of a slowdown. However, the signs of a significant weakening in the second half of the year have increased. The noticeable decline in sentiment indicators over the summer months is a clear warning that economic developments in the third quarter should be much weaker.
The exporting sectors, including tourism, are facing a particularly difficult economic situation. Over the course of the current year the export of goods still had positive growth but this was primarily the result of price reductions. The unfortunate currency situation has primarily hurt the profit margins at companies, while export levels have remained generally high. A further problem is now the declining growth path in the global economy.
The currency situation has relaxed somewhat thanks to the setting of the exchange rate limit to 1.20 CHF/EUR as it has stopped the franc from continuing to soar on the currency markets. It may be seen as a positive sentiment signal for companies and have a positive impact on mediumterm investment planning (location decisions) in Switzerland. However, the franc is still very highly valued when compared to practically all important currencies. In its forecast the expert group made the (technical) assumption that the exchange rate would remain constant (i.e. euro valued at the current level of 1.20 CHF/EUR until the end of 2012).
The unfavorable constellation of the economic weakness and the strong franc may temporarily cause economic growth in Switzerland to drop. Isolated quarters of economic contraction are possible. On the other hand the expert group thinks it is unlikely that Switzerland will slip into a deep recession (significant GDP decline over several quarters) in as far as the global economic environment does not dramatically decline once more. On the whole, the expert group sees Switzerland experiencing a significant economic dip over the next few quarters followed by a gradual recovery over the course of the coming year. For 2011 as a whole, a relatively strong GDP growth of 1.9% (previous forecast 2.1%) is still expected mainly due to the very good first half of the year. On the other hand the growth forecast for 2012 was cut significantly to only 0.9% (previously 1.5%).
Exports with pronounced weakness along with the diminishing sales and profit opportunities will lower company fixed investments. On the other hand, companies focused on the domestic market and domestic demand in general could continue to support the economy and help to cushion the general weakness. In particular the level of activity in the construction sector should continue to be high thanks to low interest rates and a growing population, though growth may have peaked. A slight positive impetus is also expected from consumption, even though consumption growth over the past quarter was slowed by diminishing consumer sentiment along with the increased shopping tourism resulting from the currency situation.
The labor market is showing the first signs that the positive trend may be turning. In August 2011 the decline in the unemployment rate on a seasonally-adjusted basis practically came to a halt (with an unchanged unemployment rate of 3%). Various leading labor market indicators signal that growth in hiring will weaken in the near future, but is not about to decline immediately. In the coming year the labor market situation may diminish slightly. As a result of economic weakness, unemployment in 2012 may rise for the first time since 2009. The expert group expects an annualized unemployment rate of 3.1% for 2011 and 3.4% for 2012.
In the forecast economic scenario, the danger of inflation in 2012 remains very low. No inflation can be seen on the horizon for goods or labor. The rising costs from petroleum prices will probably be limited in the face of global economic cooling. The group of experts thus continues to expect a very low inflation rate in both 2011 (0.4%) and 2012 (0.3%).
Economic risks
The biggest threats to the global economy and Switzerland are still the tense situation surrounding the European debt crisis and the associated nervousness on the international financial markets. Sustained financial market turbulence could have an impact on the real economy in the form of a sustained decline in share prices, with negative wealth effects for consumption, restrictive credit conditions could emerged should the banking sector come under more stress, investment decisions could be postponed due to insecurity. The negative precedent is the trend that started in fall 2008, when a crisis in trust on the financial markets triggered a downward economic spiral with a record collapse in world trade. After that experience however, the world’s central bankers have made a serious effort to stem a renewal of the financial market crisis (e.g. by swiftly supplying additional liquidity). With a view to the government debt crisis in the euro area, European economic policy will most likely make a strong effort to prevent a further escalation with risks to financial stability (e.g. uncontrolled government defaults).
Even if the current economic downturn risks are in the focus of financial markets, the current economic fears may very well prove to be overdone. First of all the temporary factors weighing on the world economy over the last few months are lifting, in particular the disruption to global production and trade chains caused by the natural and nuclear catastrophe in Japan. Another factor countering a strong downturn in the global economy are the very expansive monetary policies that have remained in place in most of the industrialized countries, the strong financial position of numerous companies (outside of the financial sector) along with the solid health of developing countries. An improvement in sentiment over the coming quarters could imply a lowering of the franc on foreign exchange markets, due to declining safe haven demand, with some positive implications for the Swiss economy.
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