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Monitor Switzerland – Switzerland Stuck in Traffic

Credit Suisse economists today published "Monitor Switzerland" for the first quarter of 2014. In this quarterly publication, they comment upon and forecast key developments in Switzerland as well as shed light on the global backdrop. They continue to forecast growth of 2.0% for 2014. In 2015, they expect the economy to grow by 1.8%. The domestic economy – in part due to existing uncertainties regarding the relationship with the EU – is losing momentum slightly, while the export sector is recovering. A side-effect of Switzerland's growth is the excessive strain on its transport infrastructure at peak commuting times. The Credit Suisse "Commuter Congestion Index" shows where traffic jams are gaining the upper hand. In the form of road pricing, the authors also present a potentially viable solution. Neither the robust state of the economy nor the inflated money supply has fed through to inflation. Quite the reverse: Credit Suisse economists now anticipate that prices in Switzerland will fall once again in 2014 (new forecast -0.1% / previously 0.2%). They also regard the risk of inflation in other industrialized countries as being minimal.

The "super-cycle," consisting of interactions and positive feedback effects between immigration, a booming real estate market and low interest rates, is likely to provide Switzerland with solid economic growth once again in 2014. At the same time, the export sector has turned the corner thanks to the recovery in the industrialized countries and is even starting to create jobs again. The positive picture is tarnished somewhat on a medium-term view, however, by the "yes" vote in the referendum on mass immigration. The effects on growth are likely to be fairly minimal in 2014, and Credit Suisse economists are therefore reiterating their forecast of 2.0% growth in gross domestic product. Potential growth could nevertheless be at serious risk in the medium to long term, according to calculations in Monitor Switzerland. For 2015, Credit Suisse economists expect the rate of expansion to slow to 1.8%.

Transport Infrastructure at Times Hitting the Buffers
In many places, the infrastructure seems to have reached its capacity limits. The number of hours of congestion on the national road network doubled between 2008 and 2012. Using census data and information on traffic flows, the Credit Suisse economists calculated a "Commuter Congestion Index" for all of Switzerland's agglomerations. The fact that commuters in the agglomeration of Zurich are worst affected by congestion comes as little surprise. In the agglomeration of Geneva, the amount of time lost due to traffic congestion is only 4% lower than in Zurich. With 79% of Zurich's traffic burden, Lausanne is the city with the third longest congestion times. Congestion in Switzerland is essentially seen as a physical phenomenon. The solutions applied to date are therefore technical: more road building, expansion of the public transport system, etc. In addition, some supporters of the initiative on mass immigration may well be hoping that the vote will help put a lid on congestion. Congestion is more of an economic problem, however: The demand for mobility is growing more quickly than the expansion of supply. The most efficient means of bringing demand and supply into equilibrium seems to be the introduction of a road pricing system, as already used successfully in several cities around the world. Unlike infrastructure expansion, this approach does not increase the demand for mobility but it does reduce congestion times. Credit Suisse economists regard road pricing as a sensible approach for cities such as Zurich and Geneva.

Factors Driving and Constraining Inflation
In a special report on the subject of inflation, Credit Suisse economists conclude that the inflation climate in the industrialized countries will remain benign for a while longer. That means there is a strong prospect of the central banks achieving a normalization of monetary policy. The slowdown in growth in the emerging-market countries also reduces the risk of commodity price shocks. Structural factors such as demographic development and ongoing globalization are additionally minimizing the likelihood of inflation. Simulations for the euro zone show that even in the event of a rapid recovery inflation could remain below the European Central Bank's 2% target for several years to come. Disappointments on the growth front would accordingly result in a sharp increase in the susceptibility to deflationary shocks – although a widespread slide into deflation seems unlikely at present. As for Switzerland, the economists expect inflation to go on flatlining. The primary reason for the persistently low rate of inflation is the Swiss franc's de-facto peg to the euro, and thus the "importing" of the euro zone's low inflation rate. For 2014, Credit Suisse expects Swiss prices to fall by 0.1%; for 2015, it anticipates a small increase of 0.5%.

Various Aspects of the Swiss Economy in a Single Publication
By taking the example of waste disposal charges, the current issue of Monitor Switzerland also shows that competition between locations results not only in differing tax rates from canton to canton but also in differences in charging policies. The publication also includes an analysis of the Swiss hotel sector, which concludes that despite the strong Swiss franc the much-feared slump in rates has not occurred. In addition, Monitor Switzerland contains an analysis of the factors driving the excessive capital inflows to Switzerland – which are resulting in the strengthening of the Swiss franc. Monitor Switzerland is rounded off by a brief analysis of the real estate market and business activity in the various sectors, as well as a commentary on the effects of wage moderation on employment levels in Switzerland.

Monitor Switzerland is published quarterly; the next issue will be published on June 10, 2014.