The global economy suffered a substantial loss of momentum in the first half of 2011. This is due in equal measure to the natural and nuclear disasters in Japan, the sustained rise in energy prices, the ongoing weakness of the US real estate market, and braking maneuvers in the monetary policy of many emerging countries and other regions, including the EMU. Squabbles about raising the US debt ceiling, renewed uncertainty over the solvency of heavily indebted European countries (triggering sharper price losses on the equity markets), and tensions on the credit markets all led to a significant erosion of confidence among entrepreneurs and consumers across the globe in August.

Despite this background of uncertainty, the economists at Credit Suisse are not assuming that the global economy will slide into a recession; instead, they expect the recovery to continue, albeit hesitantly in most of the industrialized nations. Although the increasing tax burden is slowing the economies of several of our neighbor countries in particular, monetary policy remains relaxed at global level, and is in fact becoming more expansionary. Moreover, energy prices have decreased. But – most important of all – the financial situation of the corporate sector remains strong, and this is likely to support a gradual expansion of investment activity. Without doubt, the key risks in this picture come from the precarious debt situation in the EMU and the greater vulnerability of the banks that this entails.

Swiss Economy: 2011 GDP Growth in Line with Expectations
The Swiss economy is unable to elude the slowdown in the global economy, all the more so as the strong franc is curtailing Switzerland's ability to compete on prices. A complicating factor is that the turmoil on the financial markets during August also unsettled Swiss consumers and companies. For some time now, reliable leading indicators such as the procure.ch PMI (Purchasing Managers' Index) have been pointing to a slowdown in the growth of the Swiss GDP (gross domestic product) over the coming months. Accordingly, it is not expected that the previous year's high growth rate will be matched. For these reasons, the economists at Credit Suisse are standing by their existing estimate of 1.9% for GDP growth in 2011, a significantly weaker performance than in 2010 (2.7%).

Exports: Data Better than Sentiment
Despite the gloomy prognostications, the strong franc seems to be painful but bearable. The latest available data reveal little impact from the overvaluation that has now prevailed for a whole year: The first half of the year saw nominal goods exports rise by 3.6% (in real terms: 10.5%). This places nominal growth in goods exports only slightly below its long-term average growth rate of well over 5%. Even tourism (which is sensitive to exchange rates) has developed stably thus far, with only a minimal decrease of 0.2% in overnight stays. On the other hand, the decline in export goods prices in the first half of 2011 – by a total of -6.2% including the pharma sector (or -4.2% excluding pharma products) – is more in line with the expected impact from the strong franc. Export enterprises evidently had to make concessions on prices. Moreover, not all sectors were equally able to hold their ground. Strong impetus for the positive development of revenue was generated by the watch industry and the mechanical engineering, electronics, and metals sector (MEM industry), whereas other sectors such as textiles and chemicals posted negative growth rates.

Data published to date does not yet reflect the true "stress test" that the Swiss economy has undergone, with the massive appreciation of the franc in July and August and the recent downturn in the pace of world economic growth. Moreover, the slowing effect of the high exchange rate is only likely to cut in after some delay. For these reasons, the economists at Credit Suisse cautiously anticipate growth in export earnings at a rate of 3.5% in 2011. They expect the pace to pick up slightly (+5%) in 2012. These expectations are founded on two assumptions: That the global economy will not slide into recession, and that the franc will weaken somewhat.

Consumption: Increased Purchasing Power thanks to Low Interest Rates and Cheap Prices
Consumer spending is a cornerstone of Switzerland's economic growth. This will again be the case in 2012, for several reasons: First, record low interest rates are boosting purchasing power. Second, low prices encourage people to buy. Third, the continued brisk pace of immigration is generating impetus; and fourth, hardly any deterioration in the situation on the labor market is likely in the coming year. In addition, shopping tourism now seems to have reached its peak. For 2012, the Credit Suisse economists are forecasting an increase of 1.5% in private consumer spending (2011: 1.3%).

Capital Spending on Machinery and Equipment: Conflicting Tensions
Favorable financing conditions, solid capacity utilization rates and numerous purchasing opportunities offered by the strong franc are the key features of the environment for capital spending on machinery and equipment. But momentum is being slowed by the general mood of uncertainty and reduced margins. In overall terms, capital spending on machinery and equipment is set to increase by 3.5% in 2012, following growth of 4.4% in the current year.

Construction Investment Continues Unabated, Heat Rising on the Real Estate Market
Construction activity in Switzerland will increase again in 2012 (CS forecast: 1.5%). Order books are overflowing, and capacity bottlenecks are the only obstacle to even stronger expansion. Although residential construction is maintaining its brisk pace, the market's absorption potential remains intact. This makes a crash in the near future seem unlikely, although there is growing disparity between price and income trends. But with the exception of known local hot spots and certain tourist destinations, the current situation cannot be described as across-the-board overvaluation.

Strong Franc and Low Interest Rates Curb Inflation
The Credit Suisse economists expect average inflation of 0.3% for this year and 1% for next. The latest rise in the value of the Swiss franc is curbing inflation yet again; this is evident from the fact that inflation in Switzerland has remained at approximately 0.5% for about one year now, whereas other countries report inflation rates well in excess of the price stability limit of 2%. The favorable import prices due to the appreciation of the franc have evidently been passed on, at least to some extent. Estimates suggest that about one-third of the price edge is being passed on, and pressure on importers is being stepped up all the time. Moreover, rents are falling due to repeated interest rate cuts by the Swiss National Bank via the reference rate, which reacts sluggishly, so the mild inflationary climate is set to continue for some time to come. Another reason for this is that no interest rate hikes are to be expected in the next twelve months, according to the economists at Credit Suisse.