Credit Suisse economists are leaving their growth forecast for the Swiss economy in 2017 unchanged at 1.5%. However, they are revising their 2016 forecast to 1.5% (previously: 1%). Despite this revision, growth will remain weaker than before the Swiss-franc shock. Private consumption in particular is likely to be subdued in 2017 according to the economists at Credit Suisse. Although the Swiss franc's appreciation has thus far weighed predominantly on company profits, there is now evidence of an impact on salary growth too: This is actually at a standstill on an inflation-adjusted basis. At the same time, immigration is slowing. Model calculations highlight that an increased participation rate among women and older workers is unlikely to make up for a reduction in immigration. For the same reason, a return to the growth rates seen before the financial crisis seems unlikely.

The Swiss economy will not get back into full swing in 2017 either, due to a lack of momentum among key growth drivers – in particular immigration. These are the conclusions of the Credit Suisse economists in the latest issue of "Monitor Switzerland". More than a quarter of the growth in consumption over the last seven years has been driven by immigration. Although another immigration-led rise in demand is expected next year too, it is likely to be almost one-fifth lower than in the previous year. At the same time, consumer sentiment remains depressed in light of the negative news flow from Switzerland and abroad. The Uncertainty Index, which measures the frequency of mentions of "political uncertainty" in media reports, reached a new high in the period before and after the "Brexit" vote. All the same, the economists explain in their study that Brexit's direct impact on the Swiss economy is likely to be limited. However, they also point out that any post-Brexit opportunities for the Swiss financial center are highly unlikely to be as great as has generally been expected. 

No Prospect of Major Changes in Investment Behavior

According to the Credit Suisse fall forecasts, investment will not provide any new stimulus to economic growth next year either: The need for rationalization, coupled with low interest rates and high equity valuations, does favor investment in equipment and machinery. On the other hand, the depressed outlook for revenues and continued high level of political uncertainty – including with respect to Switzerland's relationship with the EU – are having a constraining effect.

"Switzerland needs to preserve its strong locational attractions," says Thomas Gottstein, CEO of Swiss Universal Bank at Credit Suisse. "Major corporations tell us that Switzerland is becoming less important for them. In addition, SMEs fear the overall regulatory framework could worsen."

No Rise in Jobless Rate, but No Increase in Real Wages Either

Consumer decisions are made primarily on the basis of the labor-market situation. The Credit Suisse economists expect an unchanged unemployment rate of 3.3% next year. "Given the comparatively sound level of capacity utilization, companies are retaining staff as far as possible," says Oliver Adler, Head of Economic Research at Credit Suisse, "but because of declining margins and profits, companies are seeking to reduce their salary costs." According to the economists at Credit Suisse, they are doing this partly through increased use of part-time work and partly through limits on compensation. Accordingly, the Credit Suisse economists think there will only be a very modest increase in salaries in 2017. In their forecasts they anticipate a 0.5% nominal increase in wage costs. With inflation simultaneously likely to be positive again for the first time in five years at a figure of 0.5%, there is unlikely to be any real growth in purchasing power next year.

Limited Growth in Construction Investment

Although construction investment is likely to accelerate in the short term in the view of the Credit Suisse economists, this is mainly because residential construction continues to enjoy a tailwind from negative interest rates. However, Credit Suisse forecasts suggest demand for rental apartments and office buildings will tend to fall due to weaker population and employment growth while vacancy rates will increase. This is likely to limit the growth in construction investment next year, despite the fact that the economists at Credit Suisse think the Swiss National Bank (SNB) will stick with negative interest rates until at least the end of 2017.

Real Export Volumes Likely to Recover Further

For exporters, meanwhile, the situation is likely to continue easing in the view of the Credit Suisse economists. Thanks to a combination of negative interest rates and foreign currency purchasing by the SNB and assuming there are no major upheavals on the international financial markets, the Swiss franc will depreciate slightly over the course of the year according to their forecasts. At the same time, the Credit Suisse export barometer – which approximates the foreign demand for Swiss goods – indicates that export growth is set to continue in the coming months. The differences between the sectors are huge, however, as the sector part of the study shows.

Growth Needs Immigration

A return to stronger economic growth could be achieved in two ways: either through higher productivity growth, or an increase in the working population. The development of the working population will be heavily influenced by the implementation of the Mass Immigration Initiative given that migration currently contributes more than 80% of population growth. To get an idea of how restrictions – of whatever form – on immigration would impact Switzerland's working population, the Credit Suisse economists performed model calculations based on different migration assumptions. In all five calculated scenarios, growth in the working population will slow over the coming years primarily for demographic reasons. Even assuming there are no major curbs on migration, it will come to a standstill in 2020. Assuming net migration stabilizes at 40,000 people per year from 2030, which is in line with the long-term average for the last 35 years, the working population will stop growing by then at the latest. An obvious solution for averting a growth slowdown or even a decline in the working population is to increase labor force participation – in particular by women and older workers. According to Credit Suisse calculations, the already high employment rate among the Swiss population would need to increase significantly for the growth trajectory to be maintained. The prospect of this making up for the fall in migration seems rather unrealistic.

Overview of the other topics covered in the latest issue of "Monitor Switzerland"

SNB Balance Sheet and Regulation

The SNB's total balance sheet is unlikely to shrink rapidly from the current CHF 690 billion. According to the Credit Suisse economists, new liquidity maintenance rules for banks will lead to the SNB and other central banks holding much more extensive balance sheets than was the case prior to the financial crisis.

Diverging Export Performance The Credit Suisse economists have developed a new indicator that enables them to produce more accurate forecasts on which sectors will gain or lose momentum. This export momentum indicator is currently very negative in the watch industry.

Brexit Vote: Glance into the Unknown for Switzerland For Switzerland, the medium to long-term consequences of the Brexit vote remain uncertain. The negotiations with the EU are likely to prove even more difficult in the short term. The Swiss population generally sees benefits for the economy and politics.

Locational Quality: City of Basel Set to Overtake Canton of Zurich

Corporate Tax Reform III will entail a restructuring of the Swiss tax system. The attractiveness of the individual cantons will in future increasingly be determined by their ordinary tax rates on profits. The City of Basel, Vaud and Geneva are rolling up the field from behind in terms of their attractiveness.

Slowdown of Residential Property Market Continuing

The price growth of residential property in Switzerland is continuing to diminish. Increasing differences are emerging here between condominiums and single-family dwellings.

"Monitor Switzerland" is published quarterly, and is available online in German, French, Italian, and English at: https://www.credit-suisse.com/research (Swiss Economy).
The next issue will appear on December 15, 2016.