Press Release

The Swiss Economy in 2013: Bumpy, but Upwards

Economic Forecasts from Credit Suisse for 2013

Zurich,  September 6, 2012 The Swiss economy will grow faster in 2013 than in the current year. The economists at Credit Suisse forecast growth of 1.5% for 2013. Low interest rates, high levels of immigration, and a robust labor market will contribute to this expansion. The Swiss National Bank will provide vital support on the exchange rate front. However, uncertainty and nervousness will remain constant companions next year too, and not all sectors of the economy will be able to benefit to the same extent from the slight, but bumpy upward trend. The economists at Credit Suisse anticipate an inflation rate of 1% for 2013.

The main features of the world economy in 2013 will be moderate growth, significant regional differences, and numerous uncertainties. The weakest region will remain Europe's southern "periphery" which is mired in recession. Austerity measures, high risk premiums, and bottlenecks in lending mean that robust economic growth cannot be expected in 2013. The real economy in "core Europe" will benefit from the extremely lax monetary policy, which is likely to produce higher growth.

In the US, the real estate sector and the labor market are on the road to recovery, but insecurity over pending changes to economic policy (in the context of the looming "fiscal cliff") tend to hinder growth. Nevertheless, Credit Suisse's economists assume that a compromise that limits tax hikes and spending cuts will be found in November, once the presidential election is out of the way. Growth in numerous emerging economies, particularly China, is also unlikely to increase markedly. They are too strongly affected by the weakness of their trading partners in Europe. Moreover, in view of ongoing inflation risks, the scope for monetary and fiscal stimulus measures is limited.

Switzerland's Little Economic Miracle
Seen against the backdrop of the crisis in other countries, the Swiss economy presents a picture of robust good health. According to information from the State Secretariat for Economic Affairs (SECO), gross domestic product (GDP) in the second quarter of 2012 was 0.5% up on last year. The labor market has shown itself to be robust. The 3% unemployment rate is one of the lowest worldwide, and in just the past twelve months the economy has generated a net increase of 50,000 jobs. In addition, widespread fears of a fall-off in consumer demand have turned out to be unfounded and export volumes have been maintained despite all the prophecies of doom. Thanks to the stabilization of the exchange rate a year ago it looks as if the low-point for export margins has been passed. Since then exporters have been able to raise prices by as much as 10% while reducing their costs thanks to reduced import prices.

The Swiss Economy Will Continue to Grow in 2013
In 2013 the Swiss economy's structural advantages will once again provide a sound basis for success. Thanks to Switzerland's status as a safe haven and its low level of national debt, capital has never been cheaper. The low interest rates support the demand for construction investment and provide households, businesses and the state with palpable financial relief. Switzerland's flexible labor market remains attractive – also for immigrants. Immigration will therefore tend to remain at high levels. The resulting higher growth potential will make itself felt above all in increased consumer spending. At the same time the National Bank will continue to provide essential support by defending the minimum exchange rate for the franc, which should continue to improve the situation for the country's exporters. In view of all these factors, Credit Suisse's economists are standing by their forecast of March 5, 2012, in which they predicted growth of 1.5% for the Swiss economy in 2013.

High Levels of Volatility and Major Differences between Sectors
Despite the promising outlook, uncertainty and nervousness will be constant companions in 2013. The overall growth forecast disguises the expected high levels of volatility. Major fluctuations can be expected from one month to the next. The average growth figures also make it more difficult to see the outcomes for individual businesses. For instance, not all export sectors are able to hold their ground with equal success. The positive export trend was driven largely by the watch-making and food industries, while other sectors – such as engineering – had to contend with a downturn of ten percent or more. Employment growth too is far from being broadly based. Job numbers have risen in only a few sectors, such as healthcare, construction and related sectors, administration, and watch-making.

Crisis Mode Conceals Risks
In addition, the crisis mode in which the economy has been operating for the past five years also harbors a number of risks. The flood of money that the National Bank has generated in order to keep the franc's exchange rate against the euro to 1.20 conceals major inflation risks. While it remains true that the liquidity is currently being stockpiled and that its influence on the real economy is therefore marginal, any upturn in the global economy would doubtless mean that the accumulated reserves would have to be unloaded in short order. The trick will be to do it at the right time. At the same time the rise in real estate prices has led to fears of a bubble. However, the price rises are the result of demand-driven overvaluation and not a speculative price bubble. And one of the most important pillars of growth in recent years is coming under pressure as immigration advances up the political agenda. In addition, international political pressure on Switzerland is growing, which will make demands on the country's diplomatic skills and steadfastness.

Price Levels Will Continue to Rise in 2013
Average inflation in 2013 is likely to rise by 1% following a fall of 0.3% in 2012. The currently negative inflation rate is a delayed consequence of the appreciation of the franc prior to the imposition of the minimum exchange rate a year ago combined with a sharp drop in commodity prices – particularly oil prices – in the spring. Owing to the stabilization of the exchange rate the Swiss franc has lost some of its price-reducing impact. Consequently the era of sharply reduced prices for imports is coming to an end. Moreover, commodity prices have recovered, which will drive up price levels in Switzerland. But even if the inflation rate does turn from negative to positive, the mild inflation climate is likely to persist for some time yet. One major reason for this is that the repeated interest rate cuts due to the National Bank's expansionary monetary policy will have a downward impact on rents as the reference interest rate reacts sluggishly. And in the judgment of Credit Suisse's economists there is little prospect of a move to tighten interest rates in the next twelve months.

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