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If China’s growth engine sputters, the Swiss economy is also affected

Credit Suisse publishes "Monitor Switzerland" for 1Q 2019

Credit Suisse has revised its forecast for Swiss economic growth in 2019 downwards from 1.7% to 1.5%. With the slowdown in the global economy, a strong phase of growth in Swiss exports is coming to an end. Meanwhile, private consumption remains comparatively solid, partly because immigration is picking up again. The Swiss National Bank is likely to wait until at least mid-2020 before moving to raise key interest rates. Credit Suisse economists also point out in the current issue of "Monitor Switzerland" that the Swiss economy is more exposed to China than might be apparent at first glance. It is therefore an illusion to believe that Switzerland’s economy will be immune to any sharper downturn in growth in China.

The "mini boom" in the Swiss economy that was observed a year ago has come to an end more rapidly than expected. Although Switzerland's gross domestic product (GDP) increased by a respectable 2.5% in 2018, this uptick resulted solely from growth in the first half of the year. Since then, the Swiss export industry has been impacted primarily by slowing momentum abroad, with non-cyclical pharmaceutical exports disguising the general downward trend. As a result, export growth is likely to weaken further in 2019. Subdued demand for exports is generally accompanied by a reduced propensity to invest, which is why Credit Suisse economists do not expect to see any additional growth stimulus from investments in plant and machinery.

As far as construction investments are concerned, the economists are forecasting only a marginal acceleration in growth, partly due to oversupply on the rental housing market. In contrast, consumer demand should be supported by the favorable labor market situation and the slight increase in immigration for the first time in six years. However, the expected acceleration in consumer growth will not be sufficient to compensate for the slowing momentum in exports, which is why domestic economic growth this year will be weaker overall than in 2018 and slightly lower than previously forecasted by Credit Suisse (revised forecast for 2019: 1.5%, down from 1.7%).

No interest rate rise from the SNB in 2019
The economists at Credit Suisse do not expect the Swiss National Bank (SNB) to increase interest rates this year. Weaker global economic growth, the wait-and-see approach of the US Federal Reserve, and the recent easing measures taken by the European Central Bank (ECB) are the main reasons for the SNB to remain cautious. In addition, the threat of inflation is clearly limited for the time being. Credit Suisse economists are forecasting an initial SNB interest rate hike in June 2020.

If the Chinese growth engine sputters, the global economy loses steam
The loss of momentum in the global economy is partly due to a slowdown in the pace of growth in China. The outlook for China, now the world's second-largest economy, is clouded by significant risks due to the current trade conflict with the USA. Oliver Adler, Credit Suisse Chief Economist, believes that the two sides in the conflict will strike a deal in the next few weeks or months, since both are clearly seeing the negative effects of trade tariffs. However, even then there is no guarantee that the economic slowdown in China will come to an end any time soon, as the country’s growth in recent years has been driven largely by a massive and barely sustainable accumulation of debt, especially by state-owned companies. At the same time, the demographic situation in China is deteriorating as a result of its decades-long one-child policy.

The underlying cause of a slowdown in growth in China will be decisive for Switzerland
Despite China's low share of Swiss exports and the low sensitivity of Swiss export volumes to economic fluctuations in China to date, the Swiss economy would be more exposed to a sharper slump in Chinese growth than might be expected.

According to Credit Suisse economists, it is important to distinguish between two scenarios: If China's growth were to be impacted by factors that are specific to China (e.g. debt, demographics or domestic policy), the effects on Switzerland would be comparatively small. Sectors that trade directly with China and whose demand is cyclically sensitive would be worst hit. These would include the engineering, electrical, and metal industries, the watchmaking industry, and automotive suppliers with a focus on Germany. If, on the other hand, the triggers for the slowdown in growth were more global in nature (e.g. an escalation of the trade dispute), this would have more serious and wide-ranging consequences for Switzerland in view of China's pivotal role in world trade.

Even sectors of the economy not directly related to China would experience reduced demand, not least due to setbacks in the global financial markets. Finally, it can be assumed that the sensitivity of various Swiss sectors to China will change as a result of structural changes in the Chinese economy. For example, even the pharmaceutical industry, which is non-cyclical in nature, is likely to feel the impact of a decline in wealth accumulation in China.

"Monitor Switzerland" is published quarterly and is available online in English, German, and French at:

The next issue will be published on June 18, 2019.