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Effects of global economic slowdown will be felt in Switzerland too.

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UBS's economists have revised their Swiss growth forecasts downwards in line with the current global economic outlook. They are now expecting growth of 1.6% in 2001. Activity should pick up again in 2002 in tandem with an improving international economy to reach 2.1% in 2002. UBS sees no threats on the inflation front for the time being. Its inflation forecasts are 1.4% for 2001 and 1.6% for 2002 respectively. Given the deterioration in the real economy and the absence of major inflationary pressures, the SNB is likely to take a relaxed stance on interest rates. UBS forecasts a CHF LIBOR target rate of around 2.75% in the third quarter of 2001.

The US economy has lost a great deal of momentum since Q3 2000. Positive growth was still in evidence in Q1 2001, but UBS Economic Research expects growth to turn negative in Q2. The Federal Reserve's substantial interest rate cuts should begin to bite in Q3, putting the US back on course for economic recovery. Overall US growth should come in at 1.4% for 2001 and 3.0% for 2002. Japan is still struggling with structural difficulties, and these are being compounded by the effects of the US slowdown. The country's election of a new government has done little to improve its negative outlook. The Japanese economy is expected to stagnate with growth of -0.1% for 2001, rising to a still very weak 0.7% in 2002. At the start of the year, hopes were still high that Europe would remain relatively unscathed by the economic downturn in the US. However, economic indicators published since then in Europe have dampened such positive expectations. Germany in particular has put in a surprisingly poor performance. UBS's economists have revised their European growth forecasts downwards; they now expect the EMU economies to grow by 2.0% in 2001 and 2.6% in 2002. Germany's growth is estimated at 1.3% for 2001, increasing to 2.4% next year.

After an exceptional year by historical standards in 2000, the Swiss economy cooled off noticeably in the first half of 2001. This was naturally due for the most part to the global economic situation, and in particular to the poor performance of the US and Germany. While goods exports rose markedly in Q1, exports of services - a more crucial factor for Switzerland - fell year-on-year. According to UBS economic research, Swiss growth will slow further in Q2 and Q3 2001, with no turnaround expected until the global economy starts to recover in Q4. From the 2000 figure of 3.4%, the growth rate is likely to fall sharply to about 1.6% in 2001. This will probably be followed by just over 2% growth in 2002. Switzerland's growth was broadly supported in 2000, and this should continue to be the case in 2001, although all GDP components can be expected to show slightly lower growth rates this year. Export growth, the main driving force behind the upswing of 1999 and 2000, is likely to show the sharpest fall-off, but growth in construction and equipment investments should also be lower.

The recent surge in growth has resulted in a much tighter Swiss labour market. From over 3% at the start of 1999, the seasonally adjusted unemployment rate fell to below 2% by the end of 2000. However, this downward trend seems to have been coming to a halt since the start of 2001, with the most recent seasonally adjusted monthly figures (for April and May) pointing slightly upwards again. The unemployment rate is expected to average 1.8% over the year as a whole in 2001 and 2.0% in 2002. Despite this tightness in the labour market, wage pressure has remained moderate and thus helped to keep core inflation stable. In addition, the oil price is stagnant compared to last year's levels, which means that its influence on inflation is set to diminish significantly in the coming months. In fact, it may well bring the overall inflation rate down. UBS economists are therefore forecasting moderate inflation of 1.4% in 2001 and 1.6% in 2002. These figures are well below the SNB's target level for price stability.

Against this backdrop, the SNB is expected to reduce its target rate for the CHF LIBOR by a further 25 basis points on Thursday. If this does not happen, the cut will nevertheless probably be made by the end of the third quarter, as we are likely to see more bad news on the growth front and lower inflation figures over the next few weeks. The more negative the outlook, the greater the likelihood that the SNB will carry out more interest rate cuts. Long-term rates can be expected to level out and maybe even start to ease slightly towards the end of the year, before heading upwards again in 2002 as the growth situation begins to improve. However, there is a chance that they will continue to fall if brighter growth prospects fail to materialize.
UBS is looking for a slight appreciation of the EUR versus the CHF within the next 12 months, with the single currency rising from its current level of CHF 1.52 to around CHF 1.56. This trend is principally attributed to the convergence of inflation rates between Switzerland and the rest of Europe. German inflation, for example, is expected to fall from the current 3.5% to less than 2% by the end of the year, while Swiss inflation will probably settle at 1.0% to 1.5%. Since a slight appreciation of the EUR versus the USD from USD 0.85 to USD 0.95 is forecast over the next 12 months, the CHF is likely to stand at around 1.64 to the dollar in a year's time.

Zurich / Basel, 13 June 2001
UBS AG