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UBS economists expect lengthy period of economic weakness

Zurich / Basel | | Media Releases Switzerland

US: Effects of interest rate and fiscal stimuli fading; recession in second half of year; no rapid recovery in sight. Significant slowdown in Europe as well, with still high inflation preventing European central banks from lowering interest rates for the moment. Asian economies surprisingly resistant so far, but growth likely to slow increasingly; Japan on the verge of recession. US dollar expected to strengthen as economic weakness begins to make itself felt outside the US.

Sharp cuts in interest rates and tax rebates have prevented the US economy from sliding into recession until now, but the economists of UBS Wealth Management now expect the effects of fiscal concessions to peter out in the second half of the year, leaving the US economy facing the inevitable prospect of recession. Thus the US is likely to still see real economic growth of 1.3% this year, but only a meagre 1.0% next year. According to UBS Chief Economist Klaus Wellershoff, "It will take some time to reduce the large imbalances that still persist at both private and public households, placing a corresponding burden on the US economy." UBS therefore does not expect any increase in US rates by the Fed before the end of 2009.

Substantial slowdown in Europe as well
Western Europe will also see a significant cooling in economic activity. UBS economists predict a lengthy period of weakness for the eurozone, but the likelihood of a severe recession is small. In certain countries especially affected by the correction in the real estate markets and other structural disequilibria, however, a recession would seem unavoidable. This situation is exacerbated by the fact that the currently high levels of inflation leave the European Central Bank and the Bank of England little scope to soften the economy's landing by lowering interest rates. As inflation begins to fall from the end of this year, however, interest rate cuts can be expected next year.

Following an extended period of above-average growth, Switzerland will also experience a marked slowdown in economic activity. However, UBS economists are waiting until the publication of second-quarter GDP figures at the beginning of September and the revised GDP figures for full-year 2007 before adjusting their forecasts for the Swiss economy.

Asia so far impervious
Although growing domestic demand in Asia's emerging markets in recent years is helping to cushion the effects of weakening growth in the European and US economies, Japan is currently on the brink of recession and the uncertainty as to how numerous Asian economies will fare in the months ahead has increased substantially. UBS expects a steady deceleration in growth for the entire Asian economic region from its currently high levels.

US dollar should continue to firm Since the economic downturn outside the US will become increasingly visible in the months ahead, UBS economists are forecasting a further strengthening in the still extremely weak US dollar versus other OECD currencies. In addition, the currencies of emerging countries with sound fundamentals appear attractive, whereas those of financially weak countries will likely come under growing pressure.

Table: UBS Wealth Management Research growth and inflation forecasts


Andreas Höfert
UBS Wealth Management Research

+1 212 713 3326

Daniel Kalt
UBS Wealth Management Research

+41 44 234 25 60