UBS forecasts stronger 2006 Swiss GDP growth at 3.0%
The Swiss economy is currently in an excellent shape. Preliminary indicators for the coming quarters point to continued strong momentum. The UBS economists have therefore raised their already optimistic forecast for 2006 to 3%.
With an annual growth rate in gross domestic product (GDP) of 3.5%, the Swiss economy accelerated surprisingly strongly in the opening quarter of the year, It is promising that economic activity is not only robust but also broadly based. Most economic indicators suggest that the prospects for the current year remain good. Domestic demand in the neighbouring European countries is also robust, so exports are likely to remain an important source of growth. Capital investment should continue to grow strongly, given the high level of capacity utilisation in industry and healthy orders and profits. The recovery in the labour market is gathering pace and surveys suggest a sustained increase in the need for recruitment among companies. UBS is thus confident that private consumption will continue to play an important role in supporting the economy. Overall, the positive effects from external trade, investment and private consumption should translate into an average 3.0% GDP growth for 2006.
However, economic drivers are expected to gradually lose momentum in 2007. The global economic slowdown starting in the US together with a stronger CHF are likely to put the brakes on export growth. Assuming that this will also cause capital spending to slow down, UBS expects Swiss GDP to grow by just 1.4% in 2007.
Despite the present strong economic growth, the medium-term prospects for a low inflation rate remain intact. Higher oil prices and rising rents are nudging inflation up this year, but these factors are being compensated by several effects that are cooling inflation. Structural changes are likely to continue leading prices to fall, notably in telecommunications and retail. At the same time, the gradually strengthening Swiss Franc is keeping the lid on imported inflation. The opening up of the labour market to EU citizens should ensure that wage pressures remain muted. Overall, UBS expects consumer prices to rise by 1.2% in 2006 and 1.1% in 2007.
Given this strong domestic growth, the Swiss National Bank will continue to pursue its policy of gradually normalising monetary policy. UBS expects three further moves on interest rates of 25 basis points each in June, September and December, which would bring three-month LIBOR to 2.0%. Bond yields have risen noticeably so far this year and UBS economists expect this trend to continue for the time being. It is likely that the yield on 10-year bonds of the Swiss Confederation will rise to 2.8% over the next three months and then hover around that level. Short-term overshooting to as high as 3% cannot be ruled out. The franc is still undervalued and should tend to appreciate. An exchange rate of 1.53 to the euro seems realistic in the next six to twelve months, while a more pronounced temporary movement against the US dollar to as far as 1.15 looks possible given the large US deficits.
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