Swiss economy gains momentum – but slowly

Bern, 17.12.2015 - Economic forecasts by the Federal Government’s Expert Group – Winter 2015/2016* - Swiss GDP stagnated between January and September 2015. The marked slowdown in growth is mainly attributable to the appreciation of the Swiss franc from mid-January. The weaker expansion of global trade and the slowing dynamic of the domestic economy also had a dampening effect. Given that the international economy should improve gradually, the Expert Group anticipates an acceleration in economic growth in Switzerland from 0.8% in 2015 to 1.5% in 2016 and 1.9% in 2017. In view of this rather slow economic upturn, the unemployment rate should rise from 3.3% in 2015 to an annual average of 3.6% in 2016 and start falling again to 3.4% in 2017.

International economy
The moderate pace of growth by the global economy in the first half of the current year also continued in the 3rd quarter 2015. The impetus to growth from the emerging markets was subdued. At the same time, the industrialised countries essentially maintained the same moderate rate of expansion as in the previous quarters.

The turbulent events on the financial markets last summer gave rise to fears that the Chinese economy could suffer an economic collapse, which would drag other countries into a downward spiral. So far, however there are no clear indications of any sharp downturn in China. GDP growth in the 3rd quarter, at nearly 7% (compared with the same quarter in the previous year), was similar as in the first half of the year. In this context, the slight slowdown in the industrial and construction sectors has been offset by the growing services sector. In view of the structural change in the domestic economy Chinese GDP growth in the near future might be lower than in the past (6.8% in 2015, 6.5% in 2016 and 6.0% in 2017).

The slow recovery in the Euro area during the first half of the year continued in the summer months. GDP grew by 0.3% in the 3rd quarter compared with the previous quarter. Developments in the key emerging countries held back exports and consequently GDP. By contrast, the continuing expansionary monetary policy, the weak euro, persistently low oil prices and slight relaxation of fiscal policy, provided positive impulses. The situation on the labour market also gradually improved; in October 2015 the seasonally adjusted unemployment rate in the Euro area was 10.7%, the lowest level since early 2012. For some southern European countries, this decrease in unemployment rate can be explained to some degree by emigration. Against this background the economy of the Euro area should slightly pick up in the coming two years from 1.5% in 2015 to 1.6% in 2016 respectively 1.9% in 2017.

The economic outlook for the United States remains relatively bright. After a weak start to the year, US GDP growth accelerated to 1.0% in the 2nd and 0.5% in the 3rd quarter. Although the expansion in the industrial sector (exports of petroleum products from the USA increased strongly in recent years) is being hampered by the strong US dollar and the subdued economic activity in the emerging markets and, in part, also by the low oil prices, these factors are being offset by a positive performance in the construction and services sectors. Overall growth in the US economy, as already stated in the September forecast, is anticipated to continue strengthening slightly (2.5% in 2015 to 2.8% in 2016 and 2017 respectively).

The general prospects for the global economy for the next two years remain thus moderately positive.

Economic situation and forecasts for Switzerland
The economic performance of Switzerland remains subdued. After economic growth had already come to a virtual full stop in the first half of the year, the real gross domestic product (GDP) stagnated in the 3rd quarter 2015 (0.0% compared to the previous quarter). The marked slowdown in economic activity in the current year is mainly attributable to the appreciation of the Swiss franc at the beginning of the year. A strong currency combined with the slowing dynamic of global trade took exerted a drag on exports during the first three quarters of the year. Although the balance of trade in goods delivered a positive contribution to growth in the 3rd quarter, the contribution from the balance of trade in services was negative. Furthermore, key components of the domestic economy lost momentum over recent quarters. This applies in particular to the construction industry, which reported a first decrease after several years of strong growth. Domestic household and government consumption in particular provided a positive impulse in the 3rd quarter.

Survey based sentiment indicators (such as the economic surveys conducted by the KOF and the Purchasing Managers’ Index PMI) currently still show no clear signs of an economic turnaround. The surveys indicate a certain degree of stabilisation since the summer, including in the hardest-hit areas of industry, trade and tourism. At least the strong deterioration in the first half of the year has come to a halt; however, there are still no clear signs of a recovery. The business expectations (October/November) remain low and are significantly less favourable compared to the same period of last year.

The effects on prices of the appreciation in the Swiss franc at the beginning of the year continued in the 3rd quarter. In addition to import prices, also export prices, domestic producer prices and consumer prices declined significantly in the first three quarters of the year. On the corporate side, this development is reflected on the one hand in certain exchange rate benefits in the purchase of goods and services from abroad but on the other hand is also reflected in the sharp falls in margins which were accepted in order to help companies remain competitive on prices. The low margins represent a difficult challenge for many companies. Other measures were also introduced to improve efficiency (e.g. increased procurement from abroad, business process optimisation, extended working hours, partial relocation of production processes).
Despite the slight easing of the exchange rate situation since the middle of the year the Expert Group anticipates, as in the September forecast, a rather slow recovery of the Swiss economy. GDP growth for 2015 is expected to be 0.8% (previously 0.9%), with a gradual acceleration to 1.5% in 2016 (no revision) and a further rise to 1.9% for 2017. This implies a hesitant return to a normalisation of economic activity over the next two years. This forecast implies the presence of some long-lasting effects of the Swiss franc appreciation. Consequently, GDP growth for 2016 is also likely to be below average (about 2%) and it will only gradually strengthen in 2017.

Domestic demand should remain an important pillar of the economy over the entire forecasting horizon. As in the current year, given the persistently negative inflation, domestic households can expect real increases in purchasing power in 2016, which should at least partially flow into consumer spending. There are signs of a continued weakness of investments in construction in 2016 but no crisis. In addition to the low interest rate environment, a sustained population growth should support investments in construction and domestic household consumption. Foreign trade is not expected to provide any significant impetus for the current year. For the next two years, the Expert Group anticipates positive contributions to growth from foreign trade in goods and services.

The slow pace of the economic recovery is also likely to continue hampering the labour market in the coming quarters. Although employment has continued to increase since the beginning of the year, especially in the services sector, jobs have been lost in the manufacturing sector. However, the unemployment rate is only showing a slight upward trend and seasonally adjusted figure rose from 3.2% in February to 3.4% in October. The Expert Group expects this trend to continue. Employment growth in 2015 of 0.9% is projected. For 2016, an increase of 0.8% of total employment is expected. The unemployment rate is expected to rise from 3.3% in 2015 to 3.6% in 2016 (forecast unchanged from September). Employment growth should reach 1.0% on average in 2017, during the course of the gradual economic recovery, and the unemployment rate should then return to an annual average of 3.4%.

The negative trend in prices in many sectors is likely to continue for a few quarters until the effects of the appreciation in the value of the Swiss franc and lower oil prices fully vanish. The Expert Group therefore expects to see consumer price inflation in 2015 clearly in negative territory (-1.1%), remain slightly negative in 2016 (-0.1%) and not return to positive territory until 2017 (+0.2%).

Economic risks
The normalisation of U.S. monetary policy still represents a risk for the economic prospects in different emerging markets, with potential spill over effects on the global economy. In view of their fragile condition, key emerging economies might be affected by considerable turmoil and capital outflows as soon as interest rates in the USA begin to increase. Such an evolution could affect economic growth in various developed countries and indirectly in Switzerland as well.

The uncertainty regarding the future rules on immigration also poses significant risks. A restrictive implementation of the Mass immigration Initiative with a sharp reduction of migration flows could have a detrimental effect on domestic demand as well as on corporate decisions on investment and business location. In this context, there is still a certain amount of uncertainty regarding the future of the bilateral agreements with the EU.

*The Federal Government’s Expert Group on Economic Forecasts publishes forecasts for Swiss economic development on a quarterly basis. This media release comments on the current forecast of December 2015. The current edition of “Economic Trends” (“Konjunkturtendenzen”), 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 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).