Despite continued risks, the Swiss economy remains on course for recovery
Bern, 19.09.2016 - Economic forecasts by the Federal Government's Expert Group – Autumn 2016* - The Swiss economy has been able to regain momentum in recent quarters. Although the Brexit referendum did lead to increased international uncertainty, it has not resulted in any major volatility on financial markets to date. The Expert Group currently anticipates a continuation of the moderate recovery in the Euro area and the rest of the world. This set of circumstances can be expected to lead to positive effects for Switzerland in the form of higher foreign trade volume and a gradual stabilisation of the economic recovery in the country. The Expert Group is therefore largely keeping to its previous assessment (from June 2016) and anticipates a GDP growth of 1.5% for full-year 2016. For 2017, the Expert Group expects an acceleration of GDP growth to 1.8%. This will likely lead to a gradual dissipation of the slight increase in unemployment that has been recorded since 2015. The unemployment rate is expected to settle at 3.3% (annual average) in 2016 and remain at this level in 2017 as well.
The bumpy recovery of the world economy continued in the first half of 2016 as well. The Brexit referendum has added a major new element of uncertainty to the global economic picture. However, following a short initial phase of insecurity and volatility, the financial markets largely settled down over the summer and the instability that some feared would affect currency and equity markets failed to materialise. As long as this situation continues, there is a good chance that the negative economic effect of a Brexit will remain largely limited to the UK itself and will have only a moderate impact on Continental Europe and other regions around the world. For this reason, the Expert Group expects the expansion of the global economy to continue and begin to sustain itself in the coming year.
During a strong first quarter in 2016, GDP in the Euro area increased by 0.5%. Growth in the second quarter was more modest, however, totalling 0.3%. A continuation of the economic recovery is particularly indicated by the current expansionary monetary policy, a minimally restrictive fiscal policy and energy prices that remain relatively low. While the Brexit referendum might have a slightly dampening effect on economic growth in the Euro area over the next few quarters due to its effects on foreign trade (less export demand from the UK), it will certainly not cut off growth completely. So, while the Expert Group does not expect to see any further acceleration of growth in the Euro area, it does anticipate solid growth in GDP of 1.6% in both 2016 and 2017. By contrast, it appears probable that the British economy will experience a slowdown. This is due to the fact that the higher level of uncertainty regarding future contractual relationships with the EU will likely have a negative impact on investment decisions and decisions on where to locate offices, facilities etc. At the same time, the current indicators do not yet present a clear picture – and the majority of the indicators do not point to an imminent collapse of any sort.
GDP growth in the USA was below expectations in the first two quarters of 2016, which is why growth forecasts for the USA were revised downwards several times in the aftermath. Nevertheless, it does not appear as if the basic premise of continued economic expansion is being seriously questioned at the moment. There are several reasons for this. On the one hand, it is likely that certain temporary factors that slowed growth over the last few quarters (e.g. negative inventory effects, lower investment in the energy sector) are now no longer an issue. In addition, the US labour market remains robust, and this supports private household consumption. It can therefore be expected that GDP growth in the USA will increase from a moderate 1.5% in 2016 to 2.2% in 2017. Growth has remained muted in the emerging markets, but it seems that the various economies are now bottoming out. Growth in China is being driven by expansionary monetary and fiscal policies that are designed to counteract an excessively rapid slowdown. Brazil remains in recession, however. Although Russia's sharp economic downturn seems to be coming to an end, a significant recovery does not appear to be on the horizon. On a positive note, the recent stabilisation of commodity prices does improve the outlook somewhat for Russia and Brazil.
Economic situation and forecasts for Switzerland
Following the economic slowdown due to exchange rate effects last year, the Swiss economy was able to recover at the end of 2015 and in the first half of 2016. Growth in GDP increased from 0.3% in the first quarter to 0.6% in the second quarter of 2016. Growth was also more broadly distributed across economic sectors. For example, the sector for domestic government-related and private services (including health care and business services) expanded significantly in the second quarter. In addition, the situation in sectors suffering from the strong franc (e.g. industry and tourism) seems to be improving.
Still, the situation in some sectors (e.g. within the industrial sector as a whole) continues to vary greatly. The most recent economic indicators are also somewhat muted: Although the development of foreign trade remains solid and retail revenue and overnight hotel stays appear to be on the verge of a turnaround, the sentiment indicators (Purchasing Managers' Index, KOF Economic Barometer, Consumer Confidence Survey) were somewhat gloomy in the summer months. This could be due to the increased uncertainty in the aftermath of the Brexit referendum. In general, the sentiment indicators remain in a range that points to moderate economic growth.
The current development of the indicators thus leads to the expectation of a more reserved economic expansion in the second half of 2016 – i.e. growth will likely be less dynamic than was the case in the second quarter. In any case, thanks to the good first half of the year, GDP growth of 1.5% is now being forecasted for full-year 2016 (previous forecast: 1.4%). The Expert Group continues to anticipate a consolidation of positive economic activity next year, which will lead to a further increase in GDP growth to 1.8% in 2017. Following the sluggish GDP growth of 0.8% in 2015, it now appears likely that Switzerland will embark upon a course of robust growth that will largely keep pace with growth in Germany and the Euro area in 2016 and 2017.
Foreign trade in particular can be expected to once again make a more extensive contribution to economic expansion. Indeed, the outlook for exports appears relatively favourable, provided the global economy is not unduly affected by Brexit and a renewed strong appreciation of the franc can continue to be avoided. Pharmaceutical products have played a major role in the export sector recovery as of late, but we can now expect to see greater contributions made once again by other exporting industries such as the machine manufacturing, electrical and metal (MEM) industries – and the tourism sector as well. Domestic demand will likely continue to have a positive impact, although this is not expected to lead to any significant acceleration of growth. Private consumption has remained below expectations throughout the year to date, whereby this development is due to the slow growth of real wages and a slight deterioration of conditions on the labour market. Following several years of strong growth, investment in construction has been slowing down since 2015, although this development was not unexpected. Nevertheless, in view of the sustained low interest rate environment and a population that continues to increase, the outlook for both private consumption and investment in construction basically remains positive for 2017. Despite the many elements of uncertainty that have arisen over the last few quarters, investment in equipment has picked up and this development will likely continue.
The labour market continues to struggle with the impact of the economic slowdown in 2015. The strong job growth that had been registered for several years dropped off significantly throughout 2015 and the beginning of 2016. Whereas job growth merely slowed somewhat in many service sectors, jobs were actually lost in industrial sectors in particular. Nevertheless, it appears that the low point for the labour market has been reached. The Expert Group therefore believes that as the recovery proceeds, job growth will gradually pick up once again in the coming year. The continued slight increase in unemployment that has occurred since 2015 can also be expected to gradually dissipate, with the unemployment rate settling at an annual average of 3.3% in 2016 and 2017. A gradual normalisation has set in over the last few months with regard to negative inflation, and this development will likely continue (inflation forecast for 2016: -0.4%; 2017: +0.3%).
In general, the biggest economic risk is posed by the global economic recovery, which is not very resilient and which also remains vulnerable to disruptive factors. For example, the possibility cannot be excluded that Brexit might have a more detrimental effect on the European economy than is assumed to be the case in the forecast, and this in turn could negatively impact the development of the Swiss export sector. A further risk is posed by the fact that the financial sector in the Euro area has yet to be fully stabilised, as recent revelations regarding the precarious situation at several Italian banks clearly showed once again. Swiss exports could suffer substantially, should the economic recovery in the Euro area unexpectedly come to a halt. This risk would become even more threatening if increasing uncertainty in the financial sector should lead investors to once again seek shelter in the franc. Other risk factors include instability in key emerging markets (e.g. political unrest in Brazil) and geopolitical risks (e.g. escalation of violence in the Middle East, the Ukraine conflict, terrorist attacks). In Switzerland itself, there remains at least a latent risk of excessive activity on real estate markets, given the low interest rates that show no signs of increasing over the short or medium term.
* The Federal Government's Expert Group publishes its forecasts for Switzerland's economic development on a quarterly basis. The most recent forecasts, from September 2016, are discussed in this press release. The current issue of the SECO 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 (https://www.seco.admin.ch/seco/de/home/Publikationen_Dienstleistungen/Publikationen_und_Formulare/konjunktur.html).
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