Economic confidence slowly returns – more vigorous growth not before 2014
Bern, 18.03.2013 - Economic forecasts from the Federal Government’s Expert Group – Spring 2012/2013*. At the start of 2013 the Swiss economy is feeling the tailwind from the international financial markets and the signs of a pickup in the global economy. In view of the continuing stability in the domestic economy and brightening outlook for exports, the opportunities for increasing economic growth during the course of this and the next year are good. The Expert Group forecasts a still relatively moderate 1.3% rise in GDP for 2013, accelerating to 2.1% for 2014. However, despite the revival of confidence in the economy the risks are still present. In particular, a long-term resolution of the debt crisis in the Euro zone is a difficult task. The main challenge is, despite the deep economic crisis in the single currency countries of Southern Europe and the resultant risks to political stability, to maintain the social cohesion in these countries. The confidence which has returned to the financial markets needs to be boosted further still in order to create the basis for long-term growth in the Euro zone.
The global economy is currently giving the first tentative indications of a ‘spring awakening’. The success of the European Central Bank (ECB) in stemming the Euro debt crisis since summer 2012 initially allowed the financial markets to regain some confidence. Over recent weeks and months the business and private consumer sentiment indicators of the real economy have begun to paint a slightly brighter picture in many countries worldwide and point to an imminent recovery in the global economy. Nevertheless, the unresolved problem of debt in many industrialised countries is continuing to hold back recovery and still poses a risk.
The very weak final quarter 2012 (stronger decline in GDP) in the Euro zone is likely to have marked the low point in the economy and the recession gradually abated over the next few quarters providing the debt crisis remains under control. One of the central and most demanding challenges in this context is in continuing the budgetary consolidation measures against the background of the pressure posed by fragile economic development. For the time being however a deep gap still exists within the single currency region. Whilst the early indicators for Germany or Austria are already pointing to an early return to growth, there is still no sign of an economic recovery in Italy, Spain or even France. The situation in the crisis-hit Euro zone countries of Southern Europe is not expected to stabilize before 2014 as the on-going fiscal policy consolidation, rising unemployment and falling wages will continue to hold back economic activity in these countries. As a result of these diverging trends average economic output in the Euro zone could shrink slightly further during 2013 despite the start of a recovery and is likely to only achieve below average growth in 2014 (approx. 1%).
The economic outlook for the USA is more robust by comparison, even though the on-going political dispute about budgetary policy is not having a confidence building impact. The signs of budgetary consolidation - encompassing both tax increases as well as cutbacks in state spending - now emerging are likely to put a slight, temporary brake on growth. However, they are not expected to choke off economic growth. The economic recovery, driven by private investment and consumer demand, appears to be more solid than in recent years because at long last it has also extended to the real estate and labour market. The US economy in 2013 is likely to grow at around 2%, the same as in 2012 and gather impetus in 2014.
Following the slowdown last year, there are signs of a return to slightly higher growth rates in many emerging countries. However, the lack of a boost to demand from the industrialised countries is likely to be an obstacle to any strong upturn in 2013 and 2014. The pace of the growth dynamic in China strengthened once again at the end of 2012, although the latest economic indicators paint a rather mixed picture and do not suggest any acceleration.
Economic forecast for Switzerland
The Swiss economy is also feeling the tailwind from the international financial markets and the signs of a pickup in the global economy. In any event, the latest economic surveys indicate a more positive mood on a broad front over recent months. In industry, the forecasts are less pessimistic and the consumer climate has brightened. The first signs of a reversal in trend are also being seen particularly in those sectors affected by the Euro crisis, i.e. the MEM industry and tourism.
Therefore, the very potent risk for Switzerland also being caught up in the economic down-turn, as it was seen just a few months ago, seems nowadays to have been faded. In view of the continuing stability in the domestic economy and a brighter outlook for exports, the opportunities for a further increase in economic growth during the course of this and next year look good.
Nevertheless, this is no cause for euphoria as the recovery in exports is likely to only be hesitant. Although the framework conditions for exports are no longer as unfavourable as they have been over the last two years, they do remain challenging. This is mainly the case in the continuing weak sales markets in many EU countries; alongside should be mentioned the continued high value of the Swiss franc against most currencies and in particular against the Euro. However, Switzerland’s low inflation by international comparison suggests that the real overvaluation of the Swiss franc, even at consistent, nominal exchange rates, is slowly reducing; although this is a process that will take years. The Expert Group therefore forecasts a moderate pick-up in the growth of exports for 2013 and 2014.
The outlook for domestic demand remains positive, even though, following the recent strong years; it is very unlikely that we will see a further strengthening in the dynamics. The positive drivers, population growth and low interest rates, are likely to continue having an impact and providing support for the construction industry and private consumption. By contrast, we may have to wait some time yet before seeing a significant recovery in investment in equipment. Although companies are reporting a return to continually increasing order intakes, the lower than average capacity utilisation levels are likely for the time being to hold back investment activity, particularly in industry. The uncertainty in the fragile economic environment also seems to induce many companies to take a relatively cautious approach to their investment planning.
The Expert Group generally anticipates a gradual acceleration in the Swiss economy up to the end of 2014. For 2013 it expects continuing, relatively moderate growth in GDP of 1.3% (same forecast as in December 2012), which should pick up to 2.1% in 2014 (previously 2.0%) with increasing demand for exports. According to this forecast the Swiss economy will get over its economic slowdown in 2012 (1% growth in GDP) – a mild one by international comparison - but is not expected to achieve any strong upturn (growth rates markedly above 2%). Export demand is quite simply too weak for this to happen.
The weaker economy led to a slight deterioration on the labour market last year. Although growth in employment remained positive it slowed at the end of the year. Unemployment has been rising slowly since the beginning of 2012; at the end of February 2013 the unemployment rate was 3.1% (seasonally adjusted). Despite the brighter economic prospects there are as yet still no signs of any positive turnaround. The decline in the level of employment in industry, which started in the second half 2012, could continue for the time being before seeing the beginning of a recovery after several difficult years. The restructuring in the banking sector is also likely to have a continuing detrimental impact on the labour market. In the general assessment of the Expert Group the unemployment rate is expected to continue rising up to the end of this year, followed by a period of stabilisation, giving average annual unemployment rates of 3.3% respectively for 2013 and 2014 (no change over previous forecast).
Despite the return of confidence to the economy, the known risks, primarily the international debt problem, have not disappeared. For example, the budgetary dispute in the USA represents an uncertainty factor: if, contrary to expectations, this were to result in more significant, short-term cutbacks, this could have a markedly negative impact on growth in US GDP and spread to the global economy.
The greatest potential threat however remains from the Euro debt crisis which may have been stemmed but has still not been resolved. The Euro zone’s crisis-hit countries of Southern Europe have made some significant progress in structural adjustments - fiscal consolidation and improvement in the competitiveness of their export industries. However these successes do have serious side effects in the form of major economic crises and rising unemployment, with no prospects of a rapid improvement. The counties affected are experiencing growing social tensions and political resistance to the economic reforms. The difficult political balancing act of implementing the reforms as consistently as possible whilst simultaneously not completely losing the support of the population does entail hidden risks. These risks consist of the return to uncertainty in the financial markets - for example through rising interest rates. This could nip in the bud the fragile economic hopes throughout the Euro zone, as we saw last year.
However, a dramatic escalation of the Euro crisis (for example the break up of the currency region) is seen as unlikely. The main reason for this is the identifiable, significant political will in Europe to secure the future cohesion of the currency union.
*The Federal Government’s Expert Group on Economic Forecasts publishes forecasts for the Swiss economy on a quarterly basis. This media release comments on the current forecast of March 2013. The current edition of "Economic Trends", a quarterly publication from the SECO, integrates these forecasts and goes into more detail on other aspects of the current economic development. This publication appears in printed form as an appendix to the February, April, July and October issues of the magazine "Die Volkswirtschaft" (www.dievolkswirtschaft.ch). It is also available free of charge on the Internet: (http://www.seco.admin.ch/themen/00374/00375/00381/index.html?lang=de).
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