Relatively favourable economic prospects in a risky environment

Bern, 18.12.2014 - Economic forecasts from the Federal Government’s Expert Group – Winter 2014/2015*. The Swiss economy continued to grow during 2014. Nevertheless, over the recent months sentiment indicators have been signalling increased uncertainty about further economic prospects. Assuming that the Euro Zone continues its gradual recovery, the Federal Government’s Expert Group on Economic Forecasts expects for 2015/16 a slight pick-up in growth from 1.8% in 2014 to 2.1% in 2015 and 2.4% in 2016. The improvement in the economy should also extend to the labour market, enabling the unemployment rate to fall from an annual average of 3.2% in 2014 to 3.0% in 2015 and 2.8% in 2016. However, there are still considerable risks to this economic outlook. Both the risk of setbacks in the recovery of some regions and the uncertainty surrounding the relation between Switzerland and the EU could have negative effects on the outlook for 2015 and 2016.

International economy
The global economy improved slightly in 2014 and is likely to remain fragile over the next two years. World trade, which had been expanding at a significantly weaker pace than before the financial crisis six years ago, failed to gain momentum up to autumn 2014. However, behind the overall world economic performance there are diverging prospects for the major economic regions.

The US economy, which is experiencing modest but steady growth, is expected to provide the main positive impetus. The high level of private sector debt, particularly of domestic households, has been reduced during the last years. Following this adjustment there are virtually no further obstacles to an accelerated expansion of domestic household consumption and investment, even though this could lead to a renewed increase in domestic debt. Accordingly, growth in GDP is likely to increase over the next two years from a good 2% in 2014 to around 3%, with a further reduction in the unemployment rate. Given the robust economic outlook in the USA, the probability of a slight rise in interest rates by the Federal Reserve in the coming quarters is increasing.

By contrast, the economic recovery in the Eurozone in 2014 was weaker than expected and the economic outlook remains bleak further ahead. Even the German economy, which has helped in the past to lift the overall euro zone’s performance, reported a slowdown in the previous quarters, reflecting weaker export and investment developments. By contrast to these temporary weaknesses, the continuing debt problems in various countries, both in the periphery of the Euro region as well in Italy and France, could continue to dampen economic growth for years to come. Despite some significant fiscal consolidation efforts, the reduction of sovereign and private debts has been limited; apart some isolated exceptions like Spain for instance. Nevertheless, the lower exchange rate of the euro could help exports and provide support for the ongoing economic recovery. The most likely scenario for the Eurozone for the next two years remains a gradual recovery: GDP forecast for 2014: 0.8%, for 2015: 1%, for 2016: 1.5%.

In other world’s regions, the outlook is generally moderately positive. In Japan, the value-added tax increase from April 2014 had a greater impact on the economy than expected. In view of the impetus provided by the expansive monetary policy, the Japanese economy should nevertheless start to pick up gradually. Economic activity in China remained robust but on a lower growth path than before the crisis (around 6-7%), partly because of demand rebalancing and some limitation in the labour force increase. There is a diverging outlook for other major emerging economies: whilst India's economy has been constantly growing, the recovery in Brazil is still sluggish. With the rising geopolitical tensions surrounding the Ukraine crisis and low oil prices, Russia is facing a recession that could potentially develop into a currency crisis.

The sharp fall in oil prices over recent months leads to cheaper oil imports. Lower oil prices can raise the disposable income of consumers in different countries. However, the impact will not just be positive: the detrimental effect on the oil-exporting economies could offset the positive effects. The decline in inflation in the Eurozone countries in particular following the lower oil prices could increase the latent threat of deflation, if inflation expectations respond to the lower energy prices.  

Economic forecast for Switzerland
The Swiss economy continued to grow during 2014. Following a weaker 2nd quarter, the economy strengthened again in the 3rd quarter. For the year 2014, the Federal Government’s Expert Group anticipates a GDP growth of 1.8%, suggesting that, as in previous years, the Swiss economy can again outperform its larger European counterparts. However, diverse economic surveys over the last few months indicate a higher degree of uncertainty amongst businesses and households regarding the outlook. These lower expectations reflect in part the more risky global environment in 2014 (keyword: fragile economic activity in the euro region) and in part the more uncertain political framework conditioning the relationship between Switzerland and the EU (key words: immigration regime, bilateral agreements and tax policy).

Under the assumption that the gradual recovery in the Eurozone will continue, the Expert Group projects a GDP growth in Switzerland for 2015/16 that continues to be relatively high in comparison to other European countries. While exports have recently shown signs of picking up, the stronger increase has been so far limited mainly to pharmaceutical goods. Exports performance should improve in the year ahead. Net exports should contribute positively to GDP growth in 2015 and 2016. Domestic demand, which had been the main pillar for economy growth over the last few years, should continue expanding at a robust pace. The sustained increase in the population size will have positive impacts on private consumption and investment in construction. In this context however, investment in construction is likely to have passed its peak. Various factors, including the impact of the second homes initiative as well as cooling trends in the real estate market could have a dampening effect on growth in new construction investments. By contrast, the recovery in investments in equipment, which have been subdued in recent years, is expected to be more pronounced in 2015 and 2016.

All in all the Expert Group expects a slight acceleration in Swiss economic growth for the next two years from 1.8% in 2014, to 2.1% in 2015 and 2.4% in 2016. Compared to the October forecast, growth for 2015 is estimated to be slightly lower (previous GDP forecast 2.4%), attributable especially to the sluggish recovery in Europe, in particular the temporary weakness in Germany.

The annual average unemployment rate in 2014 is likely to remain unchanged compared to 2013 and is expected to remain at 3.2%. However, there was a slight downward trend in the seasonally adjusted unemployment rate recently (September to November). The decline is likely to strengthen in the next two years as the economy continues to expand. The industry sector, which on balance has lost around 35‘000 jobs (calculated in full-time equivalents) over the last six years, should contribute positively to employment growth. The Expert Group forecasts a fall in the unemployment rate from 3.2% in 2014 to 3.1% in 2015 and 2.8% in 2016 (average annual figures in each case). 

Despite the projected improvement in the economic and labour market development, continuing low rates of inflation are forecasted for 2015 and 2016. On the one side, many sectors of the economy, particularly in the export industry, should only achieve a gradual return to normal capacity utilization during the forecast period. On the other side, following the lower oil prices and the lower inflation rates in many European countries, Switzerland should experience as well dampening inflationary pressure. The Expert Group anticipates virtually zero inflation in Switzerland for 2015 (+0.2%) and for 2016 (+0.4%). Periods of negative inflation rates are not excluded. Although deflation risks remain a concern in many countries, in particular a downward spiral of a weak economy with falling wages and prices over a broad front, the Expert Group forecasts positive inflation rates for Switzerland for the two years ahead.

Economic risks
The relatively positive economic outlook remains subject to considerable risks, emanating both from the international environment and from the domestic front. The forecasted increase in the Swiss GDP could be lower in the case of setbacks in the recovery of some European countries. A sustained slowdown in growth in the emerging markets would also affect the performance of the Swiss economy. These regions have played an increasingly role for Swiss exporters in recent years.

In addition, any additional uncertainty surrounding the relationship between Switzerland and the EU would have negative effects on the outlook for 2015 and 2016. Even though the clear rejection of the Ecopop Initiative in this context might have reduced some risks, it remains open whether the negotiations on an EU-compatible immigration regime will ultimately lead to a successful outcome. If this were to result in a significant restriction in the workforce, as well as in a restricted access to the EU markets, this would be a negative signal with detrimental effects on corporate investment policy and consequently on the medium-term growth prospects for Switzerland.

Last but not least, despite some calming trends, there is still danger of overheating in the real estate market. Given the highly expansionary monetary policy of the ECB for the Euro Zone, the Swiss National Bank (SNB) is likely to be forced to maintain the Swiss franc-euro exchange rate floor for some time to come. The inevitable flip side of this is persistently very low interest rates, which have the potential to increase further real estate debt.

*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 October 2014. The current edition of "Economic Trends" (“Konjunkturtendenzen” available in German and French), 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 issues of the magazine "Die Volkswirtschaft" (www.dievolkswirtschaft.ch). It is also available free of charge in PDF format on the Internet (http://www.seco.admin.ch/themen/00374/00375/00381/index.html?lang=de.


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