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Economic forecasts for Switzerland in 2019: Growth will remain robust despite uncertainty

Credit Suisse publishes its "Monitor Switzerland" for Q3 2018

The Swiss economy is set to grow by a stronger-than-average 2.7% in 2018, according to Credit Suisse forecasts. However, this high growth rate is due to a perfect combination of factors – a scenario that is unlikely to be repeated in 2019. Economic growth is therefore likely to fall shy of the 2% mark next year. In the latest issue of "Monitor Switzerland," which is published today, Credit Suisse economists also show that Swiss wages are likely to grow at a slightly faster rate over the next few years. Nevertheless, the overall wage bill is set to remain relatively static versus gross domestic product.

The economists at Credit Suisse anticipate a growth rate of 1.7% for 2019, which seems slightly disappointing at first glance compared with the 2.7% (revised up from 2.2%) expected for the current year. However, the slowdown is partly due to the fact that no major international sporting events take place next year – licensing receipts from which are included in Switzerland's gross domestic product (GDP) on account of the fact that the country is home to numerous international sports bodies.

Meanwhile, the outlook for the export sector is not quite as favorable as it was one year ago, judging by the recent, significant fall in Credit Suisse's export barometer (which measures the potential demand for Swiss goods abroad). At the same time, companies were pleasantly surprised by the depreciation of the Swiss franc over an 18-month period, as shown by the survey data compiled by the Credit Suisse economists. In the meantime, however, the franc has experienced several bouts of appreciation and an imminent depreciation is not expected. The tight supply situation seen in the industrial sector until recently also seems to be easing. All in all, exports as well as capital spending on machinery and equipment are likely to remain buoyant in 2019, although they will be weaker than in the current year. The Credit Suisse economists also expect more sluggish growth in construction investment. Key factors here include the growing oversupply in the housing market and ever-thinner order books for civil and structural engineering firms alike.

Private consumption should remain firm in 2019, although it will continue to expand at a relatively subdued pace. The labor market has recently shown a significant, broad-based improvement. However, immigration has now stabilized at a lower level; accordingly, an additional boost to growth from what was up to now the number-one growth driver is not expected. This is compounded by the unrelenting negative news flow from abroad, which is dampening the mood among households and constraining any improvement in consumer sentiment. Wage growth is therefore likely to show only a modest increase for now, with the Credit Suisse economists anticipating a 1% increase in nominal wages for 2019. After deducting expected inflation of 0.7%, that leaves a purchasing power gain of 0.3%.

Wage growth limited by low inflation expectations and deeply rooted wage restraint
Nominal wage growth has almost halved in the period since the financial crisis. Added to that, nominal wages seem to respond less strongly to a declining unemployment rate than in the past. The Credit Suisse economists put this trend down to lower inflation expectations. In addition, the extent to which factors such as automation, digitalization, and outsourcing are depressing wages is difficult to gauge. Although automation and digitalization are indeed putting pressure on some jobs, and therefore on wages too, they are simultaneously boosting the general level of wages thanks to the creation of new jobs in high-wage areas. The extent to which migration has impacted Swiss wages is likewise unclear.

The Credit Suisse economists have also found clear indications of deeply rooted wage restraint in Switzerland: Accordingly, the theoretical potential for employees to extract bigger wage increases remains systematically unexploited. Employees in Switzerland generally seem willing to forgo maximizing salary increases in the short term in order to reduce the risk of unemployment and thus secure prosperity in the long term. Wage restraint and the good availability of skilled workers were also important reasons for the fact that employment has expanded comparatively strongly since the financial crisis despite the recession and Swiss franc exchange rate shock, according to the Credit Suisse economists. As well as being the key driver of solid economic growth, rising employment growth was partly responsible for the fact that the share of total output paid out as wages rose to a record high.

Looking further ahead, for demographic reasons alone it seems likely that the growth in employment will tend to level out in Switzerland as the baby boomers retire. That means economic growth will increasingly need to be generated by productivity increases. If that does indeed happen we could start to see a significant, sustained rise in wages. Given the substantial barriers to faster productivity growth in Switzerland – the need for deregulation in the domestic sector being one example – the Credit Suisse economists anticipate only a relatively mild acceleration in wage growth. Even so, an average inflation-adjusted rise in purchasing power of 1% certainly seems realistic over the next five years.

First SNB rate hike in autumn 2019 
The latest issue of Monitor Switzerland also examines the reasons why, in its monetary policy assessments, the Swiss National Bank (SNB) has been describing the situation on the foreign exchange market as "fragile" for the past year. The SNB is once again likely to proceed extremely cautiously in its monetary policy assessment on September 20, 2018, so as not to trigger any additional upward pressure on the Swiss franc. Accordingly, the Credit Suisse economists assume it will be another year before the SNB makes its first move on interest rates. At the same time, the SNB is likely to refrain from buying foreign exchange – at least as long as there is no significant rise in the CHF and the EUR/CHF does not fall below 1.10.

Credit Suisse Forecasts for the Swiss Economy

"Monitor Switzerland" is published quarterly and is available online in English, German, and French at: www.credit-suisse.com/monitorswitzerland        

The next issue will appear on December 18, 2018.