UBS outlook Switzerland 1st quarter 2012 - Robust domestic market helps avert a downturn

Export-oriented companies and the industrial sector have been hit particularly hard by the global economic slowdown. But a robust domestic market is preventing the Swiss economy from going down the same path as the euro area. Even so, economic conditions in both sectors deteriorated in the fourth quarter of 2011.

Zurich/Basel, 15 February 2012 – Economic growth in Switzerland has slowed considerably. The UBS GDP indicator shows that in the fourth quarter of last year the economy grew at a pace of 1.1% year-on-year. A further slowing is expected for the current quarter, with growth falling to 0.8%. For 2012 as a whole, the economists at UBS Wealth Management Research expect economic growth to be modestly positive at 0.4%. The GDP indicator is based on the results of a survey among 240 manufacturing companies.

The latest results of the survey conducted by UBS show that export-oriented companies and the industrial sector have been hit particularly hard by the global economic slowdown and the strong franc. Meanwhile, falling consumer prices are increasing the purchasing power of consumers. Along with these lower prices, record-low interest rates for the foreseeable future and continuing immigration into Switzerland are boosting consumption, construction and property prices. As a result, the Swiss economy should once again significantly outperform the European economy this year.

Falling import prices are keeping inflationary pressure very low at the moment. For this reason, and because of the strong franc, the Swiss National Bank is likely to continue its expansive monetary policy. We expect the central bank to keep interest rates on hold until at least 2014. This means that the accommodative monetary policy should continue to have a stimulating effect on the domestic economy and real estate prices for quite some time.

The strong franc is weighing heavily on export-oriented Swiss industry, raising fears of deindustrialization. However, historically there has always been a movement of jobs away from the manufacturing sector and into the services sector. The franc's weakness in the period before the crisis slowed the trend for a few years, but the strong franc is accelerating the process. Monetary policy cannot stave off structural change indefinitely; it can only slow the pace of this change.

On a regional level, the latest edition of UBS outlook Switzerland also shows which cantons are well placed to compete internationally, and which ones face problems. Here, too, the currency situation is having a significant effect.

Contact

Daniel Kalt, Chief Economist Switzerland
Tel. +41 44 234 25 60

Caesar Lack, Wealth Management Research
Tel. +41 44 234 44 13

Sibille Duss, Wealth Management Research
Tel. +41 44 235 69 54

Stefan R. Meyer, UBS Wealth Management Research
Tel. +41 44 235 38 26

UBS outlook Switzerland: www.ubs.com/research
UBS publications and projections for Switzerland: www.ubs.com/wmr-swiss-research

UBS AG

In developing the WMR forecasts, WMR economists work in collaboration with economists employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice.

The UBS Business Cycle Indicator: a barometer of the Swiss economy since 1975
Since 1975, UBS has conducted quarterly surveys of companies operating in Switzerland concerning their business outlook. UBS economists have drawn upon this data to develop an economic indicator designed to provide reliable forecasting of the outlook for the Swiss economy. The following survey elements flow into the calculation of the economic indicator: change in total incoming orders versus the previous quarter, projected change in orders for the next quarter, change in domestic and international incoming orders, production, finished goods inventories, staffing levels and order backlog.