Slow economic recovery in 2016 and 2017

Bern, 17.03.2016 - Economic forecasts by the Federal Government's Expert Group – Spring 2016*. The Swiss economy recorded in 2015 a relatively weak annual GDP growth of 0.9%. The strong appreciation of the Swiss franc was a main factor slowing down economic growth. However, this had a heterogeneous impact on different sectors. The negative exchange rate effects are expected to gradually diminish in the course of 2016 and 2017. In contrast, the international economic context has lost momentum in recent quarters and there is no clear sign of a marked acceleration of global growth. Against this backdrop, the Expert Group expects a gradual improvement of the economic situation in 2016 and 2017 and projects GDP growth to increase to 1.4% in 2016 (as opposed to the 1.5% forecast last December) and 1.8% in 2017 (1.9% forecast last December). In view of this slow improvement, the unemployment rate is likely to rise further to average 3.6% in 2016 and to start declining slightly only in 2017 (to an average of 3.5%).

International economy
Recent developments in the global economy were marked by a slowdown in commercial trade and investments, a fall in oil prices and rising volatility in financial markets. While industrialised countries should continue their tentative recovery, the risks have increased sharply for many emerging countries.

The Euro area continued its moderate recovery with GDP growing by 0.3% in the fourth quarter of 2015 with heterogeneous developments across countries. While Germany and France likewise experienced GDP growth of 0.3%, growth in Italy and Austria was lower. Spain, for its part, continues to record growth which exceeds the average of the Euro area (0.8% in the 4th quarter of 2015). The unemployment rate for the Euro area (seasonally adjusted) reached 10.3% in January 2016 (against 11.3% in January 2015), mirroring the gradual improvement of the still difficult labour market situation. While unemployment has fallen sharply over the course of one year in Spain, Portugal and Ireland, it has notably increased in Austria and Finland. As for confidence indicators in industry and services for the Euro area, these have slightly declined since the start of 2016 but, nevertheless, mostly remain above their historical average. Consequently, economic recovery in the Euro area should continue in 2016 and 2017, albeit at a relatively slow pace.

Compared to its forecasts from last December, the Expert Group has scaled down somewhat the growth expected for Japan and the United States. Growth is likely to remain quite low (less than 1%) in Japan, both in 2016 and 2017. In addition, the recovery in the United States, which provided important support for the global economy, lost momentum in the fourth quarter of 2015, in particular due to a modest contribution of private consumption to GDP and a decline in exports. The appreciation of the US dollar and the decrease in oil prices should continue to weigh on exports and investments. Furthermore, business surveys slightly deteriorated in February. In particular, the PMI for services in the United States reported a drop. The Expert Group expects a slightly weaker but robust growth of 2.3% in 2016 and 2.6% in 2017. US labour market conditions appear relatively favourable with an unemployment rate of 4.9% in February 2016 (compared to 5.5% in February 2015).

Many emerging economies, like those of Russia and Brazil, are expected to continue suffering from the fall in commodity prices. This trend affects oil prices in particular, which have decreased once again at the beginning of 2016 against a backdrop of excess supply and the appreciation of the US dollar. China, for its part, continues its slow transition to an economy which is increasingly based on domestic demand and services. Still, the risk of financial instability is considerable for many emerging economies because they are particularly affected by the appreciation of the dollar, by the slow normalisation of interest rates in the United States and by the volatility in financial markets.

Economic situation and forecasts for Switzerland
The strong appreciation of the Swiss franc against the euro hit the Swiss economy hard in 2015. This shock has had very different negative effects between business sectors, both in terms of change in real value added as well as prices and employment.

Real GDP in Switzerland rose by 0.4% in the 4th quarter of 2015 and recorded a modest growth of 0.9% over 2015 as a whole (provisional annual figure). The negative exchange rate effects on the economy are expected to gradually fade in the course of 2016 and 2017, enabling a gradual recovery of the sectors sensitive to exchange rates (industry, trade, tourism). Nevertheless, in view of the international economy's slow recovery, the Federal Government's Expert Group does not expect a marked and quick acceleration in the growth of the Swiss economy over the coming quarters. The Expert Group expects Swiss GDP growth of 1.4% in 2016 (compared to 1.5% in December) and 1.8% in 2017 (compared to 1.9% in December).

The Purchasing Managers' Index (PMI) and the KOF Economic Barometer, which improved in February, show positive signs for the Swiss economy. Other short-term confidence indicators (particularly the results of the KOF's economic survey on industry and the household survey on the consumer climate), available on a monthly or quarterly basis, generally remained at a low level until early 2016 and have not shown any sign of recovery yet.

The consumption of private households and that of public administrations should continue to sustain growth over the coming quarters in Switzerland, thanks primarily to the increase in purchasing power due to price decreases and population growth. The situation is different regarding construction and trade in goods. As far as construction is concerned, it should stabilise at a high level over the course of 2016 following several years of strong growth and a slowdown in 2015. Following a difficult year in 2015, trade in goods, both exports as well as imports, should gradually increase to growth rates which are near to their historical average by the end of the forecasting horizon.

In the labour market, the number of unemployed people increased since the beginning of 2015 at the rate of approximately 1,000 people per month (after elimination of seasonal influences). In February 2016, the number of people registered by the regional placement offices (after elimination of seasonal influences) amounts to approximately 150,000, which corresponds to an unemployment rate of 3.4%. The Expert Group expects a continued rise in seasonally adjusted unemployment in the next months followed by a slight decrease only in 2017. As an annual average, the rate should reach 3.6% in 2016 and 3.5% in 2017.

For several quarters now, Switzerland has been experiencing a drop in consumer prices. This, however, is not simply a reflection of the decline in oil prices. As a matter of fact, the Swiss Consumer Price Index, excluding energy prices and seasonal products, also fell significantly in 2015. In February 2016, the index of core inflation fell by 0.5% compared to the previous year. This trend primarily reflects the effects of the appreciation of the Swiss franc, which made imported products cheaper. By comparison, core inflation stood at +0.8% in the Euro area in February 2016 and at +2.2% in the United States in January 2016. This significant difference underlines the unique character of the price decline in Switzerland. According to the Expert Group, the negative trend in consumer prices is likely to continue in 2016 with inflation averaging -0.6% on an annual basis. In 2017, by contrast, a slight increase of +0.2% is expected.

Economic risks
Thus far, economic developments in the United States and in Europe, particularly in Germany as well as in Switzerland, have weathered both the loss of momentum in international trade and the tense situation in several emerging economies relatively well. Nevertheless, a certain contagion – whether through external trade or financial channels – cannot be excluded and currently represents an economic risk. Furthermore, future developments in commodity markets, particularly that of oil, remain highly uncertain. An additional correction in the prices for oil or other commodities could have severe consequences for some emerging countries which produce and export raw materials and which are already under heavy pressure.

The migrant crisis that the European continent must face constitutes another element of uncertainty. Although it may even have a positive short-term economic impact (through increased public expenditure), there is a risk that the apparent political difficulties to find a common, sustainable solution increase economic uncertainty and weigh on the investment climate in Europe. In addition, the possibility of the United Kingdom's withdrawal from the Union ('Brexit') increases the uncertainty about the political and economic stability of the European Union. Both the migrant crisis and a 'Brexit' have the potential to weaken the euro and reinforce the pressure on the Swiss franc. For Switzerland, the spectre of a 'Brexit' also makes a rapid implementation of the mass immigration initiative more difficult, which additionally increases uncertainty and might weigh on investment decisions in Switzerland.

* The Federal Government's Expert Group publishes its forecasts for Switzerland's economic development on a quarterly basis. The most recent forecasts, dated March 2016, are discussed in the present release. SECO's quarterly publication "Economic Trends" integrates these new forecasts and also goes into more detail on other aspects of recent economic developments. This publication is available as an appendix to La Vie économique (www.lavieeconomique.ch). It is also available free of charge in PDF format on the Internet (www.seco.admin.ch/tendances-conjoncturelles).