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Switzerland to escape recession

Written by Credit Suisse report
Tuesday, 30 September 2008
Credit Suisse says country will not suffer the recession blighting Eurozone. The Swiss economy will not slip into recession in 2009. Economists at Credit Suisse (NYSE:CS) forecast slower growth of 1.0% and easing inflation of 1.4%. Switzerland will thus not escape the global slowdown in growth, and economic growth will be below its potential. Related Articles Morning business news: 19 December Credit Suisse restructures Credit Suisse: Europe economic conditions improve Credit Suisse India appointment Morning business news However, the economic downturn will be contained, especially as the Swiss economy will grow 2009 by at least 1% for the sixth year in a row. The last time this happened was in the late 1980s. As in 2008, economists at Credit Suisse expect the US and Europe to provide little stimulus to global growth again in 2009. By contrast, emerging markets look set to make a major contribution to the growth of the world economy thanks to strong domestic economies, a change in export structures, and monetary and fiscal flexibility. Already one quarter of global economic growth can be attributed to China. Tighter Credit Conditions Remain a Serious Risk to Growth In the wake of rising unemployment, tighter credit conditions, and persistently high energy prices, consumer spending in the US will only make a below-average contribution to growth. The correction of residential construction activity is already well underway, although US house prices will remain under pressure as a result of the glut of homes on the market. The largest risk to growth, according to economists at Credit Suisse, is the impact on the real economy of tighter credit conditions, which are primarily being felt in the US and Europe. However, foreign trade can be expected to continue to support growth of the US economy next year. Economists at Credit Suisse forecast that the US economy will grow below potential both this year and next. The eurozone is now in the throes of the growth slowdown, too. It is also experiencing a sharp decrease in exports. Furthermore, the domestic economy is showing signs of cooling down. In addition to problems with the real estate market (e.g., in Spain), high energy prices have led to a significant decline in consumer demand. Investments have fallen, too. Economists at Credit Suisse therefore expect real GDP to grow by about 1.3% this year and less than 1% next year. Because eurozone inflation has passed its peak, there is also a possibility that the European Central Bank (ECB) will cut rates in 2009. The resurgence of the financial market crisis has also undermined the outlook for the US dollar, which may even experience a sharp decline in the medium term. While the economists at Credit Suisse see the US dollar in the midst of a long-term bottoming-out process, a sustained recovery of the US currency would require significantly higher interest rates. Swiss Economy Will Grow Below Potential Again The Swiss economy has proven to be rather robust. The downturn has so far mainly had a negative impact on perception, with little reflection in the economic data. GDP will grow by around 1.9% in 2008, which is a respectable figure for Switzerland, continuing the longest period of economic growth since the early 1980s. However, Switzerland will not be able to escape the slowdown in international growth. GDP growth will continue to weaken in 2009, with the economists at Credit Suisse expecting a growth rate of 1.0%. GDP will thus grow below its potential for the first time in five years, and it will do so without straining production capacity. The Swiss economy is at a crossroads, making it risky to make forecasts for the coming year. However, both recession and a renewed boom can definitely be ruled out. Baseline Effect and Weaker Economic Growth Slow Inflation Inflation reached its highest level in 15 years in 2008, largely as a result of the rising cost of crude oil. If prices do not continue to reach new highs, there will be a deflationary effect through at least mid-2009. This is due to the baseline effect: because the price of oil-based products rose almost monthly until they peaked in June 2008, the price difference compared with the same month the year before will decrease. Furthermore, demand-side inflationary pressure will decrease as a result of the economic slowdown. Falling demand will also reduce staff and technical bottlenecks. This lowers the danger that cost increases will be passed on. Such "second-round" effects would further fuel inflation. Against this background, the economists at Credit Suisse expect inflation to be 2.2% in 2008, before falling to 1.4% in 2009. Although the Swiss National Bank (SNB) is unlikely to make an interest-rate move in the near future, the economic downturn and the sound inflation outlook in the medium term may provide it with the flexibility to reduce interest rates. Why Is Switzerland Growing Despite the Turbulence in the Financial Markets? The Swiss economy is highly dependent on other countries and, at 10%, its financial sector is one of the biggest contributors to GDP. However, despite the crisis in the financial markets and global turbulence, Swiss GDP is growing. An in-depth analysis shows that there are economic and structural reasons for this. The financial crisis and the growth slowdown in Europe and the US - Switzerland's most important export markets - occurred during a period of economic strength, as reflected in full order books, healthy balance sheets, relatively high wages, and consumers in the mood to spend. The structural reasons include the robustness of the Swiss credit market, which has learned the lessons of the 1990s. In addition, the change in immigration policy led to greater growth potential by reducing staff shortages and increasing the number of consumers. Consumer Spending in Switzerland Supports Growth Labor markets generally react to changing economic demand after a delay. Employment will therefore in all likelihood continue to rise until at least mid-2009, albeit at a reduced rate. Because consumer spending is impacted heavily by the labor market situation, it can be expected to continue to support growth in 2009, but to a decreasing extent. Consumer spending will receive a welcome boost from immigration. First, it will increase the population and thus the number of consumers. Credit Suisse's economists expect the net number of new immigrants to Switzerland to increase by approximately 100,000 this year and nearly 60,000 in 2009. Second, most immigrants are highly qualified and have corresponding purchasing power. The economists at Credit Suisse forecast that the average Swiss wage bill - including the increase in employment and special benefits - will rise by 2.4%. Because inflation will likely fall next year and the tax burden will continue to decline (because of child deductions, the flat-rate deduction, and the double taxation agreement), most households should experience an increase in real purchasing power despite the increase (of about 4%) in health insurance premiums. Despite Slowing Momentum, the Outlook for Swiss Exports Remains Sound Exports were the cornerstone of the Swiss economic upswing four years ago. However, foreign trade has lost some of its momentum as the economies of Switzerland's main trading partners (eurozone and the US) have cooled. But exports will probably continue to boost the economy for two reasons. First, the portfolio of countries that buy Swiss products has been diversified, which has reduced Switzerland's dependence on individual countries. Approximately 5% of its exports now go to emerging markets, especially China. Second, high oil prices are benefiting many sectors, such as suppliers for the energy sector, and recyclers of petrodollars. The economists at Credit Suisse expect exports to grow by 3.4% in 2008 and 1.5% in 2009. The medium-term outlook remains sound. Sharp Decline in Capital Investments Capital investments will experience the lowest growth of any single component of GDP. This is because such investments react quickly to uncertain income prospects, and production capacity has been expanded significantly in recent years. Thus, a lot of capital equipment is brand new, which dampens the demand for replacement investments. By contrast, historically low interest rates will have a stimulating effect. In addition, companies have solid balance sheets after years of prosperity, which should make financing easier. The economists at Credit Suisse forecast that capital investments will increase by 2.5% in 2008, but then fall by 1.5% in 2009.