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Broad-based economic growth

International and Swiss economic forecasts for 2006 from Credit SuisseThe global economic recovery in 2004 also accelerated growth in the Swiss economy. Real gross domestic product (GDP) increased by 2.1% in 2004 and was therefore slightly above the average GDP growth rate for the countries belonging to the European Monetary Union (EMU). The faster growth of the Swiss economy is driven not only by foreign demand, but also by the domestic economy. The economists at Credit Suisse expect Switzerland's GDP growth rate to increase from 1.4% in 2005 to 1.7% in 2006. However, unemployment is only likely to fall slowly, from an average of 3.8% this year to 3.6% in 2006. Inflationary pressure will remain minimal, with an average inflation rate of 1.1% for this year and 1% for the coming year.

As the second half of 2005 got underway, various indicators pointed to a global economy recovery in the near term. However, growth jitters resurfaced towards the end of the summer due to the sharp increase in oil prices. These rose temporarily to over USD 70 per barrel and have prompted the financial markets to focus more closely on the consequences, because this involves a supply shock that could trigger more pronounced shifts in growth than a mere demand shock. However, the dip in US growth is likely to be only short-lived. Towards the end of 2005, we expect to see a substantial countermovement that will be driven by reconstruction work and should return the US economy to its original growth path. For this year, the economists at Credit Suisse are forecasting US real GDP growth of around 3.4%, which is likely to increase to around 3.6% next year. The pace of growth in the eurozone should also quicken in 2006. Following GDP growth of 1.3% this year, a rate of 1.6% is forecast for 2006.

Federal Reserve will continue to increase interest rates - ECB will not follow suit until 2006
Rising oil prices are likely to drive US inflation in part well over the 4% mark as a result of its direct effects (e.g. rents and energy) and indirect effects (e.g. transport). The experts at Credit Suisse therefore believe that further action will be needed from the Federal Reserve and expect it to raise interest rates to around 4.5%. The European Central Bank (ECB) is not likely to increase interest rates until the beginning of 2006 because economic recovery is still in its early stages in the eurozone.

Currencies: continued upside potential for the US dollar
The experts at Credit Suisse again believe that the US dollar will show a positive trend next year, and also expect the US current account deficit to stabilize because of the dollar's past weakness. The US dollar is likely to become even stronger by the end of 2005, because interest rate hikes in the US will further extend the dollar's interest rate advantage. The euro and the Swiss franc will probably regain some ground if initial interest rate increases emerge in continental Europe in the course of next year.

Swiss economic growth outpaces eurozone average
The global economic recovery in 2004 also accelerated growth in the Swiss economy. At 2.1%, the increase in real gross domestic product (GDP) was slightly above the mean rate for the countries belonging to the European Monetary Union (EMU). However, this in itself encouraging result is put into perspective by the fact that several smaller EU economies, such as Ireland, Finland, and Sweden, recorded growth rates of between 3% and 5%. The faster growth of the Swiss economy compared with the eurozone average is driven not only by foreign demand, but also by the domestic economy. The economic recovery is expected to lead to economic growth in Switzerland accelerating from 1.4% this year to 1.7% in 2006.

Foreign demand will continue to play a key role in 2006
The Swiss export industry set its sights on the emerging markets at an early stage and established a presence there. This focus is now paying off and vindicating the strategy pursued. The Swiss export industry continues to see western Europe as a vital market, but is systematically exploiting the opportunities offered by the emerging markets and the English-speaking economies, which are growing at a disproportionately fast pace. The economists at Credit Suisse estimate that growth in real exports of goods and services will be 3.9% this year, and 3.3% next year. The economists at Credit Suisse are predicting a real increase of 3.6% in imports of goods and services in 2005, slowing to 3.1% in 2006. Foreign trade will make a positive contribution to economic growth in both years.

Investment in machinery and equipment shows signs of stronger growth
The economists at Credit Suisse are expecting an increase in corporate investments and forecast real growth in investment in machinery and equipment of 2.4% in 2005 and 3.3% in 2006. Replacement and rationalization spending will increasingly be accompanied by expansion investment.

Construction investment will make a substantial contribution to growth this year, as in 2004. The key driver here is residential construction, and in particular the construction of owner-occupied apartments. Construction investment is expected to remain flat in 2006 as a result of initial saturation tendencies in the area of owner-occupied apartments. However, residential construction will remain a pillar of the construction industry. Credit Suisse forecasts a 2.4% increase in total construction investment this year.

Consumer sentiment remains muted
Consumer spending has been a mainstay of the economy for many years, without becoming a driving force. This should continue to be the case in 2006. The economists at Credit Suisse expect an increase of 1.6%, after 1.5% this year. Although consumer sentiment has recovered from its low in 2003, it remains muted and has recently showed signs of weakness again. Some households are concerned about job security and are lowering their expectations with regard to economic developments in the coming 12 months.

Three factors are likely to be responsible for this: the increase in energy costs, which limits the scope for spending on other goods and services and acts like a tax increase on consumption; the increasing absorption of purchasing power by higher taxes and rising health insurance premiums, for example; and low employment growth and an unemployment rate that is stubbornly high by long-term standards.

Swiss labor market sluggish
The Swiss labor market is reacting more sluggishly to the economic recovery than in previous cycles. Employment growth has remained slow to date and has been primarily due to the substantial increase in part-time jobs. While this trend certainly reflects a flexible labor market, it also points to restrained hiring activity by business. However, a low level of new hirings and productivity gains are not enough on their own to explain this phenomenon. Qualification deficits continue to play a part. This means that the knowledge and skills that people offer do not meet companies' demands. The economists at Credit Suisse therefore expect that the situation on the Swiss labor market will only improve slowly and that, at 3.6%, the average unemployment rate in 2006 will be only slightly below this year's level of 3.8%.

Continued focus on price stability
Credit Suisse forecasts an average inflation rate of 1.1% for this year and 1% for 2006. Price stability is thus another reason why the Swiss National Bank has no need to switch to a restrictive monetary policy. However, it will try to prevent any build-up of potential inflation that could take effect after 2006, and will therefore slightly tighten the reins on monetary policy.