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UBS forecasts slower growth for Switzerland in 2007

Zurich / Basel | | Media Releases Switzerland

The Swiss economy is poised for slower growth in 2007. UBS expects the rate to ease to 1.5% from a strong 3% this year. However, the prospects for low inflation remain good.

UBS is forecasting a marked slowdown in global economic growth in 2007. Growth momentum is set to slacken next year not only in the US, which is losing steam due to a downturn in the real estate market, but also in the eurozone on account of tighter monetary and fiscal policy. The pace of growth should, however, pick up again in 2008, not least because the US Federal Reserve should start cutting interest rates early next year.

Swiss economy to lose momentum in 2007
Based on these trends, UBS's economists are anticipating that exports will make a much smaller contribution to Swiss economic growth in 2007 than this year, where they have been providing a lot of support. Growth in capital expenditure on equipment will probably flatten as a result, particularly as the increased production capacity should start to meet slackening demand. UBS is also anticipating a gradual cooling in residential construction in 2007. Inventory reductions will probably also contribute significantly to lower economic expansion. Heavy inventory build-up is boosting the economy by 0.8 percentage points in 2006, but UBS expects destocking to shave off around 0.3 percentage points in 2007. The consumer spending picture is more positive; here the bank's economists are revising their 2007 forecast up from 1.7% to 2.0%. The continued positive labour market trend, encouraging wage growth and the likelihood of marginally lower average oil prices for the year should all support private consumption. Overall, the bank forecasts that real GDP growth in Switzerland will fall from 3.0% (2006) to 1.5% (2007), before rising slightly to 1.7% in 2008.

Moderate inflation outlook
Expectations for moderate inflation over the forecast period remain intact. Although inflation has been fuelled by oil prices in 2006, they should have the reverse effect on the overall rate next year, albeit on a small scale. Rents may again become a major inflation driver, although increases are expected to taper off here too. Looking at the broader picture, prices remain under pressure - particularly in the retail and pharmaceutical sectors - and the negative price trend will probably continue in household electronics and telecommunications as well. UBS expects inflation to fall from 1.2% in 2006 to 0.9% in 2007.

In light of this modest inflation forecast and the start of an economic growth slowdown, the bank believes the end to the tightening cycle is close at hand and is calling one last interest rate hike by the Swiss National Bank in December, which it thinks will set a target rate of 2.00%.

Swiss franc forecast to strengthen only slightly
UBS expects the Swiss franc to appreciate only slightly over the next 12 months. There will be no substantial correction in the still heavily undervalued currency as long as low inflation permits moderate monetary policy. UBS anticipates a USDCHF spot of 1.22 and a EURCHF spot of 1.56 in 12 months' time, although short-term dips below USD 1.20 are likely, depending on how the US economy performs.

Contacts

Daniel Kalt, Head of Economic Research

Tel. +41-44-234 25 60

Thomas Flury, Head of Foreign Exchange Research

Tel. +41-44-234 67 73

Karin Schefer, Economic & Swiss Research

Tel. +41-44-234 43 94