economiesuisse forecasts growth for Swiss economy

economiesuisse is forecasting gross domestic product (GDP) growth of 1.0 percent in the current year and an increase of 2.2 percent for 2018, as chief economist Rudolf Minsch explained to the media today. The pick-up in the global economy is the most important growth driver for the Swiss economy. This applies above all to growth in Europe, where Germany continues to act as a locomotive and countries such as France and Italy have finally also embarked on the recovery path.

Better and worse prospects

The Swiss franc is still overvalued against the euro, but at a level that the value-added-intensive Swiss economy can cope with. According to Rudolf Minsch, the structural adjustments throughout the value chain of the Swiss export industry are now beginning to pay off:

More efficient processes, a focus on value-intensive activities and rigid cost management allow the company to benefit from the economic recovery while continuing to drive innovation. Especially in the machinery industry, where the turnaround already began in the first quarter of 2017, the upturn is strengthening significantly. The watch industry is also growing strongly this year and is cautiously optimistic for 2018.

In the textile industry, the upswing is being delayed somewhat and will not begin until next year. Finally, after two very difficult years, the hotel industry is able to make significant gains again and is also looking positively into next year. Switzerland's most important growth sector in recent years, the chemical and pharmaceutical industry, will continue to grow relatively unaffected by exchange rate changes.

Construction has passed its zenith

Different trends dominate in the predominantly domestically oriented industries: Industries such as the energy sector, the telecommunications industry and the printing industry, whose value added is declining for structural reasons, continue to struggle with a negative trend. Although these industries are also being helped by the positive economic stimuli, these cannot reverse the trend.

By contrast, the healthcare and mail order sectors are benefiting from a sustained positive trend. A stable but more moderate development is being recorded by the financial industry, with the insurance industry likely to grow somewhat more strongly than the banking industry in 2018. While the current year is developing positively for the main construction industry, the sector expects a slight decline in value added in 2018, even though construction volumes remain high by historical standards. This will have a delayed impact on the ancillary construction sector.

Falling immigration and rising vacancy rates are weighing on price trends and causing a slowdown in residential construction activity in Switzerland. In contrast, the economic recovery is having a positive impact on commercial construction. Overall, the domestic economy is developing solidly. Nominal wage increases in the order of 0.8 percent, falling unemployment figures and generally more positive prospects for the future are stimulating private consumption, which will grow somewhat more strongly than in previous years. The brighter economic outlook is also leading to higher investment in equipment.

Inflation in positive territory, falling unemployment

After two years of negative inflation rates, prices are now rising slightly again this year (+0.5 percent) and next year (+0.4 percent). The weaker franc is causing import prices to rise again somewhat. However, the Swiss National Bank's low interest rate policy will not lead to inflationary developments for the time being. economiesuisse expects short-term interest rates to remain in negative territory in 2018 and the turnaround in interest rates not to set in until 2019. Thanks to the good economic situation, average unemployment in 2018 will fall below the three-percent mark for the first time since 2012.

Downside risks due to bubble formation

The ultra-expansive monetary policy pursued by the major central banks in recent years is having side effects in the form of bubbles forming on various markets that could burst unexpectedly and drag down the global economy. For example, the price increases in the stock and bond markets in recent months are hardly sustainable. Particularly sensational is the performance of digital currencies, led by Bitcoin. In the event of a trend reversal, it will become clear to what extent non-bank or near-bank institutions are capable of absorbing even larger losses and whether there will be no chain reactions in the financial system.

The low interest rate policy has also led to a further increase in corporate and public sector debt. In the economic upswing, a start should finally be made on reducing debt, otherwise the players will no longer be able to act in the event of a hard downturn. Finally, the Swiss real estate market is so highly valued that a turnaround in interest rates could trigger further and larger price corrections.

However, these downside risks are not included in economiesuisse's current forecast, as the timing of their occurrence cannot be predicted. Due to the continued expansionary monetary policy and the ongoing investment emergency, imbalances may even continue to build up.

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