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UBS outlook Switzerland Q1 2011 - Global economic growth offsetting impact of strong franc

Zurich / Basel | | Media Releases Switzerland

The Swiss economy will probably grow by more than two percent this year. According to UBS Research Switzerland, the strong domestic economy will offset weak exports. Inflation will likely pick up.

UBS Research Switzerland expects continuing global economic expansion, driven chiefly by the emerging countries. Global growth should continue to substantially compensate for the negative impact of the strong franc on exports going forward. Foreign trade is expected to contribute little to growth this year. The persistent strength of the domestic economy should again provide for robust economic growth of more than two percent in 2011. If the franc weakens again, net exports will boost growth considerably after a six-month delay. If by then the domestic economy has not cooled off, Switzerland's economy will run the risk of overheating.

UBS Research Switzerland does not foresee the franc rising any further. Thus the mitigating effect on inflation afforded by the strong franc will no longer be there this year. Rising commodity prices and a booming domestic economy will create inflationary pressures. For 2011 UBS economists are predicting moderate inflation of 0.9 percent, rising to around two percent in 2012.

Monetary policy to remain a balancing act
The Swiss National Bank (SNB) continues to attempt a balancing act in its monetary policy by trying to keep the domestic economy strong while attending to the vulnerable export sector. Exporters still need low interest rates to keep the strong franc from rising even further. On the other hand, the booming domestic economy and property markets call for significantly higher interest rates. The SNB will have to strike some kind of compromise in an effort to promote the country's best interests overall. Such a solution would however likely be unsatisfactory for interested parties on both sides. For exporters, monetary policy will be too restrictive and the franc too strong. For the domestic economy and property markets on the other hand, monetary policy will be too expansive and interest rates too low, posing a risk of overheating and price increases. In view of the booming domestic economy, the rise in inflation forecast by UBS Research Switzerland and the strength of the property market, the SNB is expected to announce its first move with regard to interest rates at the June meeting.

The results of the quarterly UBS economic survey of industrial and service companies on the subject of expected business development support UBS's economic forecasts. The UBS economic indicator registers solid 3.3% growth for the Swiss economy in the fourth quarter of 2010. At 3.2% the index remains at quite a high level in the first quarter, indicating that growth is not slowing significantly.

An extensive analysis of economic developments in Switzerland and abroad as well as in-depth details of the survey can be found in the latest edition of UBS outlook Switzerland. In the quarterly publication, UBS economists also take a close look at the currency situation and the real estate market in Switzerland. The special topic in this issue is the consequences for Swiss companies of a revival in protectionism. This publication is available in German, French and Italian.

Contacts:

Daniel Kalt
Chief Economist Switzerland
Phone. +41 44 234 25 60

Caesar Lack, UBS Research Switzerland
Tel. +41 44 234 44 13

Sibille Duss, UBS Research Switzerland
Tel. +41 44 235 69 54

UBS publications and forecasts for Switzerland:
www.ubs.com/economicresearch
www.ubs.com/wmr-swiss-research

UBS business cycle indicator