Download KOF 2009 Swiss economic forecast

KOF Swiss Economic Institute
ETH Zurich
WEH D 4
Weinbergstrasse 35
8092 Zurich, Switzerland
Phone +41 44 632 42 39
Fax +41 44 632 12 18
www.kof.ethz.ch
[email protected]
Press Release
Transmission Embargo: Monday, September 29, 2008, 11.30 a.m.
Main Results of the KOF Economic Forecast for Autumn 2008
The Swiss economy in the wake
of Europe’s economic downturn
The global economic backdrop
Economic risks have grown considerably. Europe’s economy was still surprisingly robust at the
beginning of the year in light of a number of perturbing factors, but as the year progressed, it
underwent a strong mood change. Spiking inflation driven by the continuously fast rise in
commodity prices – coupled with the crisis still brewing on international financial markets –
was a major factor in considerably dimming economic perspectives. This comes together with
a series of other stress factors, such as the continuous strength of the euro, waning foreign
demand, as well as some home-made problems, e.g. a significant cooling off of the noticeably
overheated real estate markets in some European countries.
In contrast, other areas of the world economy are evolving robustly. The USA, in particular, is
showing some signs that the phase of economic weakness may have already passed the low
point. The correction in the real estate market is proceeding, but a stabilisation of housing
prices – hence a quieting of the financial sector – should provide the fundamental conditions
for a sustained revitalisation of the US economy. The outlook for manufacturing has improved,
however. Capacity utilisation and investment activity have climbed since mid-year.
In most emerging markets, the economic dynamics have remained high. At the same time, the
rise in world market prices for foodstuff and commodities has increasingly caused economic and
social problems in some of those countries. The rate of growth of most economies has slowed
somewhat given this backdrop. At the same time, however, many countries are benefiting
considerably from growth in their export earnings, hence the emerging markets overall are
clearly making an above-average contribution to growth in the world economy.
In the coming months, most countries will experience a drop in the inflation rate. Because of
positive base effects, inflation should be coming down markedly from its summer highs – in
July 2008, for example, inflation reached 4.1 per cent in the Eurozone. Nevertheless, scattered
second-round effects are visible, so the lowering of the inflation rate will by and large be on the
sluggish side.
The central banks reacted in different ways to the current situation. In April 2008, for instance,
the Fed cut its interest rates by another 25 basis points to 2 per cent, while the European Central
Bank (ECB) raised interest rates by 25 basis points to 4.25 per cent to meet the threat of
inflation. But there are signs that the interest difference will narrow in the forecast period.
Economic developments in Switzerland until 2010
Because of the revised assessment of international economic developments, we are being
confronted with a massive correction of the relevant framework conditions for forecasting
Switzerland’s economic development. Because the international economic environment has
become bleaker, the now four-year period of above-average growth in Switzerland will be
coming to a sudden end. In early summer, a slight economic slump was being forecast. Now,
however, we are being confronted by a recession scenario – albeit a mild and short one. In our
current forecast, the quarterly real GDP growth rate will show slightly negative values for
two consecutive quarters – 2008Q4 and 2009Q1, which would fulfil an often used criterion
for a recession. This year, we can expect a growth rate of 1.9 per cent over 2007 thanks to high
growth at the end of last year. Because growth will temporarily come to a halt around the
new year, economic performance will only climb by 0.3 per cent in 2009. The nadir will be
reached in the coming winter. However, that will be followed by a rapid recovery, producing a
real GDP growth of 1.5 per cent in 2010.
The brief and massive increase in the value of the franc in the wake of the crisis in the financial
markets has already dissipated. The worsening economic outlook and the decline in inflation is
now giving the Swiss National Bank (SNB) some monetary leeway. In light of the astonishingly
rapid deterioration of the international situation and the generally delayed effects of monetary
policy on the development of the GDP in the neighbourhood of four to six quarters, the SNB
cannot counteract the downturn expected at the end of the year, but can support the
recovery. We assume that during the winter, the SNB will be dropping the target range for
the three-month LIBOR in two successive 25-basis-point steps. The CHF/EUR exchange rate
should remain stable at around 1.60 francs. The US dollar, the British pound and the Japanese
yen should be chalking up gains against the Swiss currency.
In spite of a negative fiscal impulse, fiscal policies will tend to support the economy owing to
automatic stabilisers. In the past year, public budgets have profited from their savings efforts
and the favourable economic environment. In 2007, their surpluses (including social insurances)
climbed to 2.2 per cent of the GDP thanks to higher revenues. A significantly lower surplus of
1.1 per cent of GDP is beginning to take shape for the current year owing in particular to some
nonrecurring expenditures. This should also strengthen the economy in the current year. The
crisis in the financial markets will only make itself felt in the 2009 and 2010 budgets, when
Press Release • KOF Autumn Forecasts 2008 • Monday, September 29, 2008
page 2
the growth in revenues loses momentum. Since a change in government spending can only
be implemented with some delay, the surpluses will decline to 1.0 per cent and 0.6 per cent
of GDP. Public consumption will grow slower than revenues. In the current year, budgets do
make an increase of 1.9 per cent seem realistic. For 2009 and 2010, the KOF sees growth of
public consumption at around 1 per cent. The policies of tax-cutting and the will to limit the
public share should have a slowing effect.
The principal transmission channel between the EU economy and Switzerland is, as usual,
exports. The sharp downturn of important trade partners will result in Swiss exports experiencing strong headwinds. The fact that the decline in exported goods and tourism is coming in
a phase during which the financial services industry are confronted with a significant drop in
demand will also exacerbate the situation for Switzerland. In the light of declining of exports,
Swiss companies will have to quickly resize their investment plans. The days of high growth
rates for investments in equipment are gone for the moment, and commercial construction
remains weak. Residential housing investments should prove to be the most resilient.
The export-oriented companies will be the first to be confronted with adverse market conditions. The extent of the economic decline in the export segment does mean that it will soon
be spilling over into the rest of the economy. The only branches that are liable to be spared
and will therefore provide a certain stability are those that are not very reactive to the
economic situation, like education and health care. Switzerland’s currently vigorous private
consumption will continue to support positive GDP growth rates, but it cannot prevent the
forecast decline, merely slow it down.
The continuous and strong rise in employment in the past years, which also resulted in an
increasing rate of employment, will soon be ending. We expect Swiss companies to cut back
on jobs on balance. However the drop in employment figures will not be so sharp as to lead
to widespread lay-offs due to the market situation. Rather, one can expect a restrained replacement of workers owing to jobs opening up as part of the normal fluctuations. The rise in
unemployment will therefore be rather moderate. Those affected, according to this scenario,
will mainly be the people entering the labour market, so we can expect an above-average
increase in youth unemployment.
This will have some effect on wages since the employees’ negotiating power depends strongly
on dynamics in the labour market. In 2007, wages grew relatively slowly owing to lower
bonus payments, but the flourishing employment situation ensured that employees received
distinctly higher incomes in 2008. In the autumn of the current year, during which salaries
will be negotiated for 2009, the overall situation will not be as rosy. The wage increase will
probably be weaker as a result.This applies mainly to the average wage compensation computed
by KOF, which will only increase by 2.8 and 1.7 per cent in 2009 and 2010, respectively. With
Press Release • KOF Autumn Forecasts 2008 • Monday, September 29, 2008
page 3
inflation dwindling as well, this represents in fact real salary increases. Growing employment
often brings with it a drop in labour productivity. This also applies to the current situation.
This year, for example, labour productivity in Switzerland should decline by 0.4 per cent. But,
increasing salaries also mean a rise in unit labour costs, which in turn will mean lower profits.
This should, however, be turning around in the coming year already, with higher earnings thanks
to a rise in productivity in tandem with wage restraint.
Private consumption will continue to support the economy, albeit at a lower level than in the
summer forecast. Private consumption was still growing by 2.1 per cent in 2007, and after a
good first half-year, it is now showing a tendency towards weakening. Retail is still flourishing,
but car registration figures and the turnover in hotels and restaurants are already stagnating.
That seems to suggest that the peak of consumer activity has been passed. Nevertheless, in
spite of a recent noticeable deterioration in the consumer sentiment, the KOF assumes that
growth will still be at 1.9 per cent in the current year. In 2009, the restrained domestic
economy and slower increase in incomes will have a dampening effect on private household
spending. The low point will be passed in 2009.
The worsening Swiss domestic economy, caused for the most part by weaknesses in exports,
will be noticed in the importation of goods. Accordingly, for 2008, it should show a slight plus
of 1.7 per cent. The reoccurring of vigorous growth will begin in 2010.
In the first half of 2008, the consumer price inflation accelerated massively and stood at 3.1
per cent as of July, which is clearly above the SNB’s zone of tolerance. Crude oil and refined oil
products were not the only culprits. The price of imported goods rose on a broad front, and
the price of foodstuff rose as well. The easing of the raw materials markets should allow
inflation to start dropping slowly again. The weakening in real economic growth will also
contribute to this. Furthermore, capacity utilisation will be dropping as well – along with less
sharp salary increases. Hence, a consumer price rise of 2.6 per cent can be expected for this
year. In the coming two years, it should be dropping to about 1.5 and 1.3 per cent, respectively.
The forecast economic downturn can be compared with the bursting of the "dot-com" bubble
in the year 2001. In the long run, it should be less pronounced and will be considerably shorter if,
as we assume here, economic activity in our most important export destinations quickens at
the end of this year. The world economy will be moving at a more staid pace than in past
years. This will have an impact on Switzerland, an exporter of investment and luxury goods,
and will clearly be felt in the tourism sector. Hence, the upswing will be rather moderate.
Press Release • KOF Autumn Forecasts 2008 • Monday, September 29, 2008
page 4