GDP growth likely to be just 1.8% in 2005

The latest European growth figures have confirmed fears of a temporary slowdown in the European growth pace. Although UBS does not expect to see a similar weakening in Switzerland in the third quarter, this will nonetheless have an impact on the Swiss economy over the medium term. UBS is sticking to its previous GDP forecast for this year, but is revising its growth expectations for 2005 slightly down.

This revision in forecasts is primarily centred on foreign trade. UBS expects weaker growth in goods exports in the coming year, given that demand from Europe will not be as good as previously expected, and the weak dollar will also hamper the competitive position of European exporters.

Private consumption is likely to remain robust, although retail sales were slightly weaker in the third quarter. UBS's internal indicators continue to point to a healthy growth trend, and there has also been no further deterioration in unemployment for over a year.

Capital spending on equipment is likely to be affected by flagging exports to Europe, with growth set to be slower - albeit still robust - in 2005. Construction spending has continued its positive trend, mainly due to the favourable interest-rate environment boosting residential construction.

All in all, the more modest foreign trade and capital spending outlook points to slower growth rates next year. Nevertheless, UBS remains optimistic: GDP is likely to expand by 1.9% this year, and then by just 1.8% in 2005. The expected pick-up in European growth in 2005 will help the Swiss economy to post slightly stronger growth in 2006 (2.0%).

Inflation, too, will not rise much above the current level over the next couple of years. UBS expects consumer prices to rise by 0.8% in 2004 and 1.0% in 2005.

Developments on the job market have been more modest than expected, with the unemployment rate remaining doggedly static at 3.9% over the past 12 months. However, there are increasing signs that the turning point has been reached and that a drop is on the cards. Unemployment is likely to ease back to 3.2% in 2005.

Against the backdrop of weak growth, the ECB is unlikely to raise interest rates in the foreseeable future, so the Swiss National Bank (SNB) is also likely to adopt a cautious stance on monetary policy. UBS expects two further moves on interest rates of 25 basis points each in the winter and spring, which would bring the three-month LIBOR to 1.3%. On the bond market, the slowdown in growth - coupled with moderate inflation - will only result in a modest rise in yields.

The SNB's rate hikes have so far been accompanied by an appreciation of the Swiss franc as expected. According to UBS's analysis, this process will continue in 2005, which is likely to pull the exchange rate versus the euro below 1.50 over a 12-month horizon. Over the same period, we expect the USD to depreciate further against the EUR and CHF as the mounting twin deficits in the US increases the currency risk.


Contact:
Dr. Klaus Wellershoff, Chief Economist UBS
Tel. +41 1 234 67 03

Dr. Daniel Kalt, Head of Swiss Research
Tel. +41 1 234 25 60

Thomas Kägi, Macro Research
Tel. +41 1 234 35 54

Thomas Flury, Head of FI / FX Research
Tel. +41 1 234 67 73

Zurich/Basel, 18 November 2004
UBS