Modest GDP growth expected for Switzerland

Bern, 16.06.2016 - Economic forecasts by the Federal Government's Expert Group – Summer 2016* - The economies of industrialised nations are currently growing at a moderate rate. While the United States saw only weak GDP growth in the first quarter, the Euro area's growth was a pleasant surprise. Growth projections in emerging countries for 2016 are revised downward for the fifth time in a row. A range of economic indicators suggests that the global economy will develop fairly positively this year and next. The risk of a persistently negative price trend reduced slightly over the past few months in various countries. In this positive yet fragile environment, the Swiss economy is set to grow by an average of 1.4% in 2016; real growth of 1.8% is forecast for 2017. Over the coming months, unemployment will rise marginally once again (average for 2016: 3.6%, 2017: 3.5%), while a small increase in employment is expected (+0.4% on average) by the end of the year. There are therefore no major changes to forecasts for GDP and the labour market between March and June 2016.

International economy
The global economic situation is still marked by moderate growth rates. The mixed international economic picture is reflected in the growth figures for the first quarter of 2016. While GDP in the Euro area grew by 0.6% with respect to the previous quarter, confirming that the pace of recovery has quickened slightly, growth in the United States (+0.2%) weakened for the third time in a row, whereas Japan experienced positive GDP growth (+0.5%) following a decline in the last quarter of 2015. The most recently published GDP growth rates in China are below 7% (compared to the previous year), a rate that will probably not be reached in 2016 and 2017.

In the short run, the growth prospects of industrialised countries and major emerging nations remain modest and are plagued by a large number of uncertainties and risks. The possibility of the United Kingdom's withdrawal from the European Union and the uncertainty about the implementation of necessary structural reforms in southern Europe continued to fuel the unease on the financial markets, particularly in the first quarter of 2016. Emerging countries posted weak growth rates until May 2016 because they are suffering from persistently low commodity prices and the additional burden on economic output created by homegrown structural problems. The persistently low commodity prices are weighing heavily on the economic development of major emerging nations, which undermines global demand and indirectly slows growth in the economies of industrialised countries. However, available indicators for the global economic provide a few positive signals, which point to a marginal recovery for the first two quarters of 2016, following a deterioration in the second half of 2015.

Economic situation and forecasts for Switzerland
For several months now, the Swiss economy has been affected by different and sometimes opposing factors. On the one hand, the return of growth in various European countries is having a positive impact on Switzerland's external trade. On the other hand, the slower momentum of international trade, particularly due to the weaker growth of emerging economies, is preventing Switzerland's trade balance from generating more sustained impulses to stimulate growth.

Opposing trends have also been observed at the level of the industrial sectors. While the production of pharmaceutical products never really stopped growing, even at the worst points of the financial and economic crisis, many other industrial sectors are not enjoying the same success, with a lower level of production in 2016 than before the crisis of 2008-2009 in some cases. This heterogeneity in the relative development of the various business sectors characterises the recovery spreading through the Swiss economy since 2009.

On the labour market, after seasonal adjustment , employment expressed in full-time equivalent positions stopped growing in the third quarter of 2015 and even fell slightly in the first quarter of 2016 according to the latest figures supplied by the Swiss Federal Statistical Office (FSO). This drop is particularly marked in the secondary sector. The most recent unemployment figures available show that the monthly increase (after elimination of seasonal influences), which began at the end of 2014, has slowed slightly in the first few months of 2016, while remaining positive. Around 500 to 900 more people have registered for unemployment insurance each month since the start of 2016 (after elimination of seasonal influences).

The latest economic indicators available (KOF Business Tendency Surveys, PMI) indicate an improvement in the situation at the start of 2016. However, the yield curve of interest rates still shifted downwards during the last few quarters, not only in Switzerland but also in a number of different European countries. In principle, this type of trend continues to indicate a weakness in demand for capital as against its supply and indirectly reflects a still sluggish economic situation. Since the beginning of 2016, the Swiss consumer price index has almost stagnated (after seasonal adjustment), following a period of decline since September 2014. Producer and import price indices followed a similar pattern and, in the first months of 2016, have started growing slightly again. These evolutions show that the tendency of decreasing prices observed in 2014 and 2015 has weakened, in particular since spring 2016.

Against the backdrop of persistently sluggish global growth and highly heterogeneous developments in the industrial sectors, both in terms of production and employment, the Federal Government's Expert Group has not changed its forecast that Swiss GDP will grow less than its historical average in both 2016 and 2017. The Expert Group is still envisaging real GDP growth of 1.4% in 2016 and 1.8% in 2017 (the same forecasts as in March 2016). Inflation and the GDP deflator are expected to decline by 0.4% on average in 2016 (identical forecast for the two indices). For 2017, the Expert Group envisages growth amounting to 0.3% and 0.2% for the consumer price index and the GDP deflator, respectively. Therefore, nominal GDP is anticipated to increase by 1.0% in 2016 and 2.0% in 2017. On the labour market, the unemployment rate is set to rise to an average of 3.6% for 2016 and 3.5% for 2017. A few more jobs are expected to be created on average in 2016 (a change of +0.4% for average employment expressed in full-time-equivalent positions), with an anticipated increase of +0.6% in 2017 (the forecast from March is unchanged).

Economic risks
The heterogeneity observed in the relative development of the sectors over the past few years is currently preventing the Swiss economy from growing more vigorously. There is still uncertainty about the potential recovery that may occur during the rest of 2016 and in 2017 in those sectors which have suffered heavily from the weak European economy and strong Swiss franc over the past few years. Sectors that have already grown significantly in the recent past should basically continue on their healthy trajectory over the forecasting horizon.

The outcome of the vote on 23 June regarding the future of the United Kingdom in the EU (Brexit) is also a risk factor. A withdrawal of the United Kingdom from the EU, with yet fairly unclear arrangements to be made subsequently, would have consequences on different exchange rates and other financial variables, and probably also on companies' investments and, indirectly, on international trade. Apart from the risk posed by Brexit, a latent volatility prevails on financial markets, which is linked to the situation of many Chinese companies whose financial health is not disclosed in a transparent manner. The change of direction expected in monetary policy, particularly in the United States, is also causing uncertainty. The risks of major capital flows and the impact on exchange rates, particularly between Asia and the United States, are continuing to influence economic forecasts. If interest rates on capital markets remain at a very low level for a long period of time or even negative for the sovereign debt instruments of several European states, this also creates risks in connection with the information given by these interest rates about the risks actually taken.

* The Federal Government's Expert Group publishes its forecasts for Switzerland's economic development on a quarterly basis. The most recent forecasts, dated June 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 (https://www.seco.admin.ch/tendances-conjoncturelles).
** Seasonal influences are eliminated by the Short-Term Economic Analyses team at SECO.

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