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UBS Outlook Switzerland: Switzerland at parity
UBS economists lowered their growth forecast for the Swiss economy this year from 1.8% to 0.5% after the EURCHF exchange rate floor was abandoned. UBS expects the Swiss franc to fall slightly against the euro in the next 12 months and fluctuate around the 1.05 mark. As long as the franc remains significantly overvalued, however, the Swiss National Bank will keep interest rates negative.
Zurich/Basel, 13 February 2015 – The Swiss National Bank's (SNB) decision to abandon the exchange rate floor of 1.20 francs to the euro will likely take a serious toll on the economy. UBS economists responded to the franc's appreciation by lowering their growth forecast for gross domestic product this year from 1.8% to 0.5%. Net exports are expected to decline. The strong franc should weigh particularly heavily on the metalworking, electrical, machine and tourism industries. UBS economists are not even ruling out the possibility of a technical recession, defined as two successive quarters of economic contraction. For 2016, UBS economists now forecast 1.1% growth instead of 1.7%.
The main scenario envisioned by UBS analysts assumes the EURCHF exchange rate will drift sideways around parity for the next six months. Broad-based growth in Europe should make European investments more attractive and reduce political risk. As such, the EURCHF exchange rate is forecast to rise slightly this year and fluctuate around the 1.05 mark. The USDCHF exchange rate, for its part, is anticipated to move sideways near 0.91 with some volatility.
The SNB will continue to employ negative interest rates as long as the Swiss franc remains significantly overvalued. This will make franc-denominated investments less attractive. UBS economists do not expect the European Central Bank (ECB) or SNB to boost short-term interest rates back into positive territory before 2017. The anticipated economic weakness will also keep long-term rates low for a long time, but they may dart into the positive range now and again. If the Bank of England (BoE) and the Federal Reserve (Fed) lay the groundwork for raising interest rates in the second half of the year as expected, 10-year Swiss government bonds should follow them upward and provide positive yields again in 12 months.
The housing cooldown first observed in 2013 continued last year. Prices for condominiums and single-family homes rose more slowly than the 15-year average growth rate. Long-term consequences of abandoning the exchange rate floor – higher unemployment, falling wages, etc. – prevent an optimistic forecast for real estate prices. They will not adversely affect the property market much at first, since continued falls in interest rates and the near-term prospect of further robust immigration will continue to support it. Nonetheless, UBS analysts assume that the housing market has peaked and prices will, at best, stagnate this year.
Daniel Kalt, Regional CIO Switzerland
Phone +41-44-234 25 60, firstname.lastname@example.org
Sibille Duss, UBS Chief Investment Office WM
Phone +41-44-235 69 54, email@example.com
Veronica Weisser, UBS Chief Investment Office WM
Tel. +41-44-234 50 62, firstname.lastname@example.org