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Swiss economy defies drop in US growth.

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The markets' estimation of the US economy has worsened dramatically over the past few weeks. While the main concern at the start of December was just how hard the expected "soft landing" would turn out to be, this has been replaced by fears of a recession. There were two reasons for this considerable shift in opinion: a variety of worse-than-expected statistics from the US and the US Federal Reserve's surprise interest rate cut. UBS's economists have also revised their US growth forecasts downwards. However, they are expecting a slowdown rather than a severe downturn. For the year 2001 as a whole, UBS's economists put US growth at 2.2%, with a first-half figure of 1.6% rising to 2.7% in the second half of the year. Growth should accelerate once again in 2002 to reach 3.0%.

Poor US performance hits Japan harder than Europe

There can be no doubt that, since the US is the driving force behind the global economy, a weakening of its economy will have repercussions around the world. However, the different regions will be affected to different extents. For Europe (the EMU states), UBS has lowered its 2001 growth forecast slightly to 2.5%, but the 2002 figure remains unchanged at 2.8%. The impact on the already shaken Japanese economy, meanwhile, is likely to be more severe. UBS now forecasts growth of 0.7% for Japan in 2001, with second-half growth approaching zero.

Only minimal effects expected in Switzerland

On a more positive note, there are currently no indications that the global economic slowdown will have a significant effect on Switzerland's economy. Swiss growth is not dependent on exports alone. As a result, UBS sees no reason to alter its growth forecasts of 2.2% for 2001 and 2.0% for 2002. The growth motors behind these figures have changed slightly, though. The balance has shifted by a small amount from export-driven growth to domestic growth, in particular in terms of consumer spending and investment.
The principal risks inherent in this Swiss growth scenario relate to a marked deterioration in consumer sentiment and a sharper-than-expected economic downturn in Europe. Both of these developments could force us to revise our figures downwards.

Further interest rate cuts expected

UBS's economists expect the Fed to follow the surprise interest rate cut it made at the start of the year with further moves to reduce rates by a total of 150 basis points between now and mid-year. As far as the European Central Bank (ECB) is concerned, though, they currently see no grounds to anticipate a more expansive approach in the near future. A downward step of 25 to 50 basis points should take place, but not before the end of the second quarter. The strength of the domestic economy will likewise enable the Swiss National Bank (SNB) to postpone any action for the time being, particularly since the core inflation rate is expected to rise further in the near future on account of the tight labour market situation. However, if the ECB loosens the screw earlier than expected the SNB is more than likely to follow suit as the CHF could otherwise run the risk of overheating. The general cooling-off in the first half of the year should make for stable interest rates at the long end, although these may be in danger of rising gradually during the second half. UBS estimates that the 10-year government bond yield will be around 3.9% at the end of December. This prognosis is supported by our currency forecasts. UBS expects the EUR/CHF figure to reach 1.54 in June 2001 and 1.58 by December. It expects the EUR/USD figure to hit 1.05 in June and 1.00 by December, which implies a USD/CHF rate of 1.47 in June and 1.58 in December.


Zurich / Basel, January 19, 2001

UBS