At present, the Swiss economy appears to be virtually immune to the impacts of foreign crises because of the supercycle in which its domestic economy currently finds itself. According to an analysis by Credit Suisse economists, around one-quarter of the growth in consumer spending since 2008 can be attributed to immigration. At the same time, low interest rates have brought relief to homeowners that can be quantified at an average of around CHF 18,000 per household over this period. The growth dynamic is further strengthened by positive feedback effects and interactions: Growth in consumption is feeding through into employment growth, which in turn is having a positive impact on immigration. Driven by both the low interest rate environment and immigration, the Swiss real estate boom is also creating new jobs, which again makes the country attractive to immigrants. In addition, this boom may also be having positive asset effects – and so the circle continues. At the same time, a driver and side-effect of this supercycle is an increase in average household indebtedness.

GDP Growth to Be More Broad-Based in 2014
Credit Suisse economists believe that the current supercycle will continue in 2014. The number of immigrants is likely to remain high, with greater numbers from southern Europe offsetting the slower rise in immigration from the north. Although there is likely to be a further gradual rise in interest rates, new mortgages will remain cheaper than many of the old mortgages reaching the end of their term, which is why the interest rate effect should continue to be positive. To a certain extent, saturation effects are likely to impose a certain limit on the growth in consumer spending. For example, consumers brought forward their purchases of new cars due to ‘discounted euro offers’, and demand is therefore now weakening in this area. In addition, Switzerland is likely to experience only limited growth in real wages. Although wages should rise by 0.8% next year in nominal terms, inflation is also likely to be positive over the same period (Credit Suisse forecast for 2014: 0.6%, after -0.1% for 2013), which will provide little in the way of a boost to purchasing power. Overall, the momentum of the domestic economy will slow slightly. However, as the export economy should recover at the same time – with the recession in the eurozone at an end, the US economy picking up steam, and the exchange rate situation less acute – and since companies are increasingly keen to invest, economic growth can be expected to accelerate overall next year. Credit Suisse economists are forecasting growth in real gross domestic product (GDP) of 2.0% for 2014, following a forecast of 1.8% for 2013.

Two Years On, Will the SNB Abandon Its Minimum Exchange Rate?
In view of the positive growth outlook, the minimum EUR/CHF exchange rate of 1.20 appears less necessary from an economic perspective than it once did, and a discussion of exit scenarios is therefore only logical. However, with companies experiencing low capacity utilization and having limited scope to increase wages, the threat of inflation is low, and the Swiss franc is still slightly overvalued. Moreover, the Swiss economy is still not immune to the risk posed by another exchange rate shock. With respect to the risk of the real estate market overheating, the SNB is likely to continue to rely on the impact of so-called microprudential and macroprudential measures, such as the anti-cyclical capital buffer. In the longer term, Credit Suisse economists believe the SNB will be looking to resume its traditional interest rate policy. Two scenarios are conceivable here: In the positive scenario, the Swiss franc depreciates, leaving the SNB free to remove the minimum exchange rate without triggering any problems. In the less positive scenario, the threat of inflation increases, as does the upward pressure on the Swiss franc. If the SNB were faced with the dilemma of having to combat inflation (with a restrictive monetary policy) on the one hand, and having to defend the minimum exchange rate (with an expansionary monetary policy) on the other, it really would be in a no-win situation. It would probably have to tolerate a controlled appreciation of the Swiss franc, for example by reducing the minimum EUR/CHF exchange rate to below 1.20. In order for the markets to view the reduction of the minimum exchange rate as credible, however, this appreciation would either have to be substantial or be conducted in successive steps. In this scenario, abandoning the minimum exchange rate altogether appears extremely unlikely, given the economic and political repercussions that such a move would trigger. From today's perspective, Credit Suisse economists believe that the EUR/CHF minimum exchange rate of 1.20 is likely to remain in place until at least the end of 2014.

Supercycle Will End at Some Point
Switzerland's recent economic track record is impressive, and the country has been receiving international plaudits in view of its ‘exemplary approach’ in certain areas, such as that of financial policy. Even though Credit Suisse economists discern only modest economic obstacles and limited challenges to policy stability in the near future, they see a number of substantial risks in the longer term, particularly in the area of financial policy  but also with respect to productivity growth and the capacity for reform. In their new publication ‘Monitor Switzerland’, the economists set out what they consider to be ten myths concerning the Swiss economy.

Further information, a table of forecasts, and the publication ‘Monitor Switzerland’ are available at:
www.credit-suisse.com/research (economy)