Swiss economy: between a rising domestic demand and subdued exports
Bern, 11.06.2013 - Economic forecasts from the Federal Government’s Expert Group – Summer 2013* - Despite the ongoing recession in the Euro zone, the Swiss economy continued to perform relatively well in the beginning of 2013. There is however still an imbalance between a robust domestic demand and subdued exports. This pattern of economic activity is likely to continue during the further course of the year. Growth dynamic should remain moderate overall and unemployment should continue to rise slightly. The Expert Group essentially reaffirms in June its assessment of a slow economic growth in 2013, with a GDP increase of 1.4%, a forecast mostly unchanged from last March. For 2014 it expects a broadly based economic recovery, extending to exports and the labour market (GDP-forecast: +2.1%). This does however assume a recovery in the global economy and, in particular, that the Euro zone will finally move out of recession, which is currently still surrounded by considerable uncertainty.
The recovery in the international economy remains sluggish. As a result of the strains caused by the sovereign debt problems in many OECD countries, the dynamic of global economic growth is unlikely to gather any noticeable momentum until the course of 2014. However, the pattern of development is very varied in the major economic regions.
The weak economy of the Euro zone is continuing to drag on the global economic activity. Although the debt crisis on the financial markets has eased further over recent months, as reflected for example in the lower risk premiums for government bonds issued by the peripheral countries of Southern Europe, the Euro zone is still mired in recession. For many Euro zone countries of Southern Europe, torn between fiscal policy austerity, structural reforms and a still fragile banking sector, the end of the economic downturn is not yet in sight. The current factors, which are dampening the economic activity, are unlikely to change or vanish in the near term. In the context of weak economic development in some countries and fiscal austerity, there is evidence of greater flexibility (i.e. more time for the deficit reduction), without signs of fundamental move away from the path of fiscal consolidation. Against this background, the assumption is that the Eurozone economy will contract further this year (assumption -0.7%) and only begin to recover in 2014 (+0.9%). The growth gap between the core, Germany and Austria for instance, and the periphery of the Euro zone - countries which are in a recession and suffering pain from the austerity programs or structural reforms, such as Italy, Spain or even France - will remain.
By comparison with the fundamental economic and structural problems in the Euro zone, the economic prospects for other regions of the world look brighter. In the USA, following a long lean spell, the labour market showed some signs of modest growth during the latest months. The long-awaited improvement in the construction and the real estate sectors seems to be under way. The drive towards budgetary consolidation, encompassing both tax rises as well as linear cutbacks in spending (so-called „Sequester“), would therefore appear to be economically sustainable and should not pose any barrier to a gradual upturn in the US economy. In Japan, various economic policy measures have given a strong boost to the economic prospects, which now look brighter. The expansive monetary policy has led to a marked devaluation of the yen, which currently give Japanese exporters a competitive advantage. In addition, new economic programmes are being launched, although these will be at the cost of a further rise in sovereign debt. The emerging countries are continuing to provide the engine driving the global economy, even though with unequal growth dynamic in various countries. Whilst the pace of growth appears to be accelerating in numerous Asian economies, the economic data for China is only moderate. Further countries such as Brazil and those in Eastern Europe are finding it difficult however to reach higher growth rates.
Economic forecast for Switzerland
Against the background of the recession in the Euro zone the Swiss economy is continuing to perform relatively well, posting a marked, positive rise in GDP in the 1st quarter 2013 (+0.6% compared with the previous quarter). However, there is still no sign of a change in the uneven picture between a robust domestic demand and subdued exports. Areas geared towards the domestic economy, such as the construction and real estate sector as well as public and private sector services, are benefiting from the steady level of immigration, low interest rates and relatively healthy government finances and remain on a positive course. By contrast, export-driven areas such as industry, tourism and some areas of trading are suffering from the recession in the Euro zone as well as from the continuing negative effects of the strong Swiss franc.
Apart from the fluctuations on a quarter by quarter basis, the Swiss economy has been in a period of slower growth for some time (mid 2011). The continuing small rise in unemployment – the unemployment rate (seasonally-adjusted) has risen from 2.7% at the beginning of 2012 to 3.2% at the end of May 2013 – is also evidence that despite all the resilience the economy is not fully immune to events in the international environment.
There are no signs of any fundamental change in the economic situation in Switzerland over the coming quarters: the current surveys of companies and private households are uneven – neither any sharp deterioration nor far-reaching improvement. Overall assessments are cautious, particularly in industry where it is characterised by a relatively significant level of uncertainty and a corresponding reticence when it comes to investment planning. Investment in equipment is likely to remain weak for the time being and actually shrink on a year on year basis. Given the recession in the Euro zone the prospects for exports remain subdued**. Nevertheless, the Swiss export industry is likely to benefit from the fact that economic prospects outside Europe, particularly for North America and Asia, present a comparatively brighter picture. By contrast, private consumption and investment in construction in Switzerland can be expected to provide again an important support to growth.
According to the Expert Group, for 2013 economic activity is projected to expand by 1.4%, essentially in line with the previous forecast issued in March (1.3%)***. GDP is expected picking up some speed in 2014, also extending to exports, assuming global economic activity improves as expected. The previous growth forecast of 2.1% for 2014 remains unchanged.
In view of the moderate economic prospects an improvement in the labour market situation is likely to still be some way off. On the employment front, although there are still no signs of any fall in the level, the rate of increase is slowing. The slow rise in unemployment is likely to continue further over the months ahead, with the possibility of a reversal of this trend during the course of next year as the economy recovers. The Expert Group reaffirms its forecast annual average unemployment rates of 3.3% for 2013 and 2014 respectively, compared with 2.9% in 2012.
The debt crisis in the Euro zone is still seen as the greatest economic risk. Despite the calmer financial markets the crisis cannot be considered as having been overcome because the Euro zone countries of Southern Europe are still a relatively long way from achieving any far-reaching economic (structural) improvement. Growing social tensions and lack of political unity could jeopardise the necessary economic reforms both in the individual countries as well as on the European level (unresolved implementation of banking union). This can create renewed uncertainty on the financial markets and ultimately place a further drag on the economic recovery in the Euro zone. In this case the Swiss franc could face renewed upward pressure against the euro. Another risk to the global economy stems from the emerging countries in which the expected acceleration in growth is still not guaranteed.
In addition to these uncertainty factors surrounding the global economy, Switzerland also needs to continue paying attention to the "home-made" risk of overheating on the real estate market. Historically, the financing of real estate purchases have remained very attractive for some time now, posing the risk of an overheating demand.
*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 June 2013. The current edition of "Economic Trends" (Konjunkturtendenzen/Tendances conjoncturelles), a quarterly publication from the SECO, available in German and French, 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).
**Furthermore, exports and imports in goods in the year 2013 are affected by the modification in the systematic of electricity trade starting from January 2013. This modification reduces the growth rates in exports as well as in imports in the annual average 2013 for approximately one percentage point. However, there are no effects on the trade balance and therefore on growth in GDP.
***This slight adjustment is due to the technical effect of the first quarter 2013 being integrated into the forecast.
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