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UBS expects stronger GDP growth of 2.3% in 2006

Zurich / Basel | | Media Releases Switzerland

The Swiss economy is enjoying a fast pace of growth thanks to the marked recovery seen since the middle of 2005. In view of the persistently favourable global economic situation, UBS economists are raising their 2006 GDP growth forecast for Switzerland from 2.0% to 2.3%.

Gross domestic product (GDP) increased by 2.7% year-on-year in the final quarter of 2005, thereby reaching its highest rate of growth since the first quarter of 2001. The very encouraging industrial performance, the upturn in consumer sentiment and the increasingly improved job market situation all point to similarly strong economic momentum for the time being. The export sector especially is benefiting from the persistently favourable global economic environment and in particular from the burgeoning industrial activity in Europe. There is unlikely to be much of a slowdown in the rapid expansion until the second half of the year. According to UBS economists, Switzerland may achieve an average 2.3% real GDP growth in 2006.

The revised forecast primarily relates to exports and capital spending. UBS anticipates that exports will remain a key growth driver in 2006 and in particular that European demand will be somewhat higher than previously assumed. While the expected slowdown in US growth is likely to impact on Europe and Switzerland as well, the effects will not be evident until the second half of the year at the earliest. Equipment spending is also set to increase somewhat more strongly than previously expected in 2006, boosted by improved sales and earnings situation and increasing capacity utilization. Finally construction spending should also remain solid, albeit slightly less dynamic than in the two previous years, thanks to the continuing high level of residential construction.

The outlook for private consumption is entirely positive at present. Following on from the clear upturn in sentiment evident for some time in the corporate world, confidence has now filtered through to private households as well. The renewed confidence has been driven in particular by greater job security and the outlook for wage increases in Switzerland. Indicators point to further improvements in the job market situation, with unemployment set to fall to an average of 3.4% in 2006 and 3.2% in 2007.

Inflationary pressure remains low despite the higher growth. Although the annual inflation rate peaked at 1.4% in February 2006, core inflation, which strips out volatile components such as food, energy and fuels, remains at a very low level of just below 0.5%. The main factor pushing up inflation over the winter months was the unexpectedly sharp rise in oil prices, but pressure from this area is likely to ease as the year progresses. UBS expects to see an average inflation rate of 0.8% in 2006, rising to only marginally above 1% in 2007.

In view of the healthy state of the economy, the Swiss National Bank (SNB) will take further advantage of the scope to lift its key interest rate from its historic lows. Given the low inflation forecasts, however, the SNB is likely to remain on a rather moderate course. UBS expects a further rate hike of 25 basis points in June, followed by a pause. As a result, the forecast for the three-month money market rate at the end of 2006 is 1.6%.

The yield increase at the long end is set to be moderate due to the very low inflation expectations. UBS expects the yield on ten-year government bonds to rise only moderately to 2.5% by the end of 2006. Yields are likely to trend sideways thereafter due to the weaker economy worldwide.

Contacts

Dr. Daniel Kalt

Head Economic & Swiss Research

Tel. +41 44 234 25 60

Karin Schefer

Economic & Swiss Research

Tel. +41 44 234 43 94