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US recession hits Switzerland

| Media Releases Switzerland

The UBS economists have revised their 2002 economic forecasts for Switzerland sharply downwards. This is because of the international economic situation, particularly as regards the USA. They expect 1.6% growth for 2001 (unchanged) and 1.0% growth for 2002 (previously 2.1%). In particular, Q4 2001 and Q1 2002 should see extremely low growth of 0.9% and 0.4% respectively. The Swiss economy is unlikely to rebound until H1 2002, returning to its trend growth of 1.8% in 2003. Inflation should not be a problem against the background of very weak growth. Inflation forecasts are 1.1% for 2001 and 1.0% for 2002. Given the strong CHF, the Swiss National Bank (SNB) will probably continue its policy of monetary relaxation in the months ahead.

The American economy finally appears to have left the pathway of growth. If before 11 September there were many signs that the economic downturn in the USA would last longer than one quarter, the situation has deteriorated massively in the wake of the devastating attacks. Until then, consumers were the only remaining support for the US economy. Both the direct effect of the attacks and the increased uncertainty on the financial markets should seriously depress consumer sentiment and in turn consumer spending. As a result, the UBS economists expect the USA to see three quarters with negative growth (Q3 2001, Q4 2001 and Q1 2002), equivalent to a recession. For the full year 2001, growth should be only 1.0%, with just 0.4% growth in 2002. From Q2 2002, the US economy should return to positive growth, with a return to rates of over 3%. Japan, which has already long been in a sustained downturn, is also weighed down by the American decline. Here the UBS economists expect -0.8% growth in 2002, after -0.9% growth in 2001. The American recession will also leave its mark on Europe. While it is true that the UBS economists do not anticipate a recession there, they nonetheless predict a sharp decline in growth. Growth in the euro zone is forecast to be 1.4% for 2001 and only 1.1% for 2002. Q1 2002 should be particularly weak, with annual growth of only 0.1%.

The negative trends in Swiss growth observed in Q1 2001 were more than confirmed by the figures for Q2 2001: growth in H1 2001 was characterized by contracting capital expenditure on equipment, a weak construction sector, sluggish visible exports and a sharp fall in the export of services. If it had not been for the continuing steady consumption and the massive build-up of stocks, the economic picture for Switzerland would already have looked far more dismal in Q2 2001. A turnaround in the currently weak growth components is not expected for the months ahead. The UBS economists instead predict that consumption will now also show lower growth rates, against the background of a slight rise in unemployment and real incomes that will grow only weakly compared with 2001 (1.0% in 2002 after 2.9% in 2001). The economic cycle should bottom out in Q1 2002. For 2001, the UBS economists still predict 1.6% growth. But this should fall to 1.0% in 2002 before rising to 1.8% in 2003. Exports, construction and capital expenditure on equipment will face difficulties in the next few quarters, but the growth in consumption will also be lower in 2002 than in 2001.

The situation on the Swiss labour market should see a further relaxation. Given the assumed decline in growth next year, unemployment should rise again. After 1.8% this year, the unemployment rate is forecast to be 2.5% in 2002 and 2.6% in 2003. Because of the economic slowdown and assuming relatively stable oil prices and rising unemployment, inflation will not be an issue in Switzerland in the next two years. After 1.1% in 2001, the UBS economists expect 1.0% in 2002 and 1.6% in 2003. Over this period, inflation is unlikely to go above 2% (the SNB's limit for price stability).

In the past two weeks the SNB has twice lowered its target range for Libor, each time by 50 basis points. This took place against the background of the CHF appreciating rapidly against all currencies. Further interest rate moves must be expected if the CHF persists at its present level, particularly since the current inflation-free environment permits a more relaxed monetary policy. The UBS economists forecast a further 50 basis point reduction in the target range for Libor by 7 December at the latest. A further 25 basis point cut is expected by the end of Q1 2002. As for long-term interest rates, lower levels are expected in the next six to nine months. Long-term interest rates are unlikely to rise until the economy starts to pick up again in H2 2002.

The UBS economists believe that the SNB will continue to try to weaken the CHF against the EUR. Thus the EUR/CHF exchange rate should return to 1.50 by the yearend. Since drastic measures to weaken the currency have in the past often led to overreactions, the UBS economists expect the EUR/CHF rate to be 1.55 in six months. But the rate should fall back to 1.53 in the space of a year. As EUR/USD parity is expected within a year, the USD/CHF rate should also end up at 1.53 in 12 months' time.

Zurich / Basel, 27 September 2001
UBS AG

Duration

New Rate

Old Rate

2 years

2.25 %

2.50 %

3 years

2.25 %

2.50 %

4 years

2.50 %

2.75 %

5 years

2.75 %

2.75 %

6 years

2.75 %

2.75 %

7 years

3.00 %

3.00 %

8 years

3.00 %

3.00 %

Duration

New Rate

Old Rate

2 years

2.25 %

2.50 %

3 years

2.25 %

2.50 %

4 years

2.50 %

2.75 %

5 years

2.75 %

2.75 %

6 years

2.75 %

2.75 %

7 years

3.00 %

3.00 %

8 years

3.00 %

3.00 %

9 years

3.25 %

3.25 %

10 years

3.25 %

3.25 %

We therefore request that you take the new interest rates into account when compiling tables in the finance section of your newspaper.

Zurich / Basel, 27 September 2001
UBS AG