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October economic survey

Written by Paul Williams

Thursday, 16 October 2008

Credit Suisse (NYSE:CS) says economic outlook is falling as widely expected.

The October Financial Market Test Switzerland, carried out by Credit Suisse in cooperation with the Centre for European Economic Research (ZEW), reveals that the economic outlook has deteriorated considerably.

The Credit Suisse ZEW indicator of economic expectations fell by 46.7 points to -91.1 points. Only 2.2% of respondents expect the economic environment to improve over a six-month horizon.

The experts also conveyed a somewhat more pessimistic assessment of the current economic picture compared with the previous month's survey, with the relevant balance dipping by 11.1 points to the 6.7 mark and thus just barely remaining in positive territory.

While the balance for inflation expectations continued to hold steady at -46.7 points, expectations regarding short-term interest rates diminished noticeably in the October survey, falling from -6.8 to -51.1.

The financial market specialists also expressed a more downbeat assessment regarding the labor market situation, with more than 80% of respondents predicting that the unemployment rate in Switzerland will climb in the coming six months.

The results of the October survey conducted in conjunction with the Financial Market Test Switzerland reveal that expectations on the part of the financial market experts regarding economic momentum in Switzerland have plunged to a record low: 93.3% of respondents forecast a deteriorating economic picture ahead.

A marginal 2.2% of the analysts anticipate that the situation will improve, while 4.4% foresee an unchanged economic climate. Accordingly, the Credit Suisse ZEW indicator of economic expectations dropped by 46.7 points to -91.1 points.

Although the experts' assessment of the current economic environment still remains in positive territory at 6.7 points, the October reading declined by 11.1 points versus the previous month's figure. Roughly three fourths of the financial market specialists view the prevailing economic situation as "normal," in contrast to just 15.6% who still regard it as "good."

After climbing for around one year, the inflation rate in Switzerland decreased again in August to 2.9%. A clear majority of the experts (60%) anticipate that inflation will continue to decrease. The proportion of respondents who predict that inflation rates will either rise or remain unchanged amounted to 13.3% and 26.7%, respectively. The relevant balance held steady at -46.7 points.

In the wake of the globally concerted action to cut interest rates by several major central banks, the Swiss National Bank (SNB) also reduced its target interest rate from 2.75% to 2.5%. Precisely 60% of the financial market analysts believe that short-term interest rates will decline further. As a result, the corresponding balance sank noticeably by 44.3 points to -51.1 points.

The stock markets experienced severe swings in shareprice in recent weeks. After a week of substantial losses, the Swiss Market Index (SMI) recorded record-high gains. However, roughly half of the survey participants still think that stock prices will advance on a six-month horizon. One-fifth of respondents continue to forecast that share prices will lose further ground.

About 50% of the analysts believe that the Swiss franc will continue to strengthen against the euro, with the relevant balance edging down slightly by 4.4 points to reach 40 points.

Oil prices have decreased considerably in recent weeks and are currently below USD 80/barrel. Nearly half of the financial market experts (46.7%) expect no change in the price of oil, while 40% predict a further decline. The corresponding balance thus slipped markedly by 22.2 points to hit -26.7 points.

Analysts' assessments of gold prices have hardly changed compared with the previous month's survey: 43.2% think the gold price will continue to climb, while 27.3% foresee sinking prices.

Dampened economic expectations were also manifested in the experts' assessments of corporate earnings, profit margins and the unemployment rate in Switzerland. Consequently, 88.4% of the participants forecast a deteriorating situation for corporate earnings as well as profit margins. The relevant balance therefore dropped to -88.4 points in both areas.

Similarly, the majority of the analysts (82.2%) expect the Swiss unemployment rate to increase, and only 15.6% see the jobless rate holding steady.

Within the scope of this month's "special question," the financial market experts were asked to convey their point of view regarding the financial market crisis. The responses show that the vast majority of analysts believe that further consolidation in the banking sector will take place. While most survey participants advocate stricter government regulations, measures such as a ban on short sales are viewed in a relatively contentious light.

The survey process and methodology

The ZEW has conducted a similar monthly survey for Germany since 1991. The aim of the Swiss survey is to develop indicators both for Switzerland's general economic climate as well as for the Swiss services sector.

Specifically, survey participants are asked to give their medium-term expectations for important international financial markets as regards the development of the economy, the inflation rate, short- and longer-term interest rates, equity prices and exchange rates. In addition, the financial experts are also asked to assess the earnings situation of companies in the following Swiss services sectors: banks, insurance, consumer/retail, telecoms and services as a whole.

The results represent the net difference between the percentage of positive and negative responses. Figures in parentheses show the changes for each indicator compared to the previous month.