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UBS Outlook Switzerland: No additional growth, but broader support
The UBS Chief Investment Office Wealth Management expects solid growth for the Swiss economy this year, which will likely be supported by more sectors than last year. Rising oil prices should bring inflation for the first time since 2014. The SNB will keep interest rates in the negative zone, however, because the ECB is not ready to raise rates.
Zurich, 26 January 2017 – UBS economists project Swiss gross domestic product to grow 1.4% this year. This means no acceleration in economic growth versus last year, but it will be more broad-based. The recovery in 2016 rested heavily upon individual industries like pharmaceuticals. This year the majority of Swiss industries should have adjusted to the new exchange rate realities, enabling them to contribute to growth again. Unemployment should therefore decline to 3.2% for the current year from an average 3.3% last year. In addition, import prices declined in 2016 due to the appreciating franc in the prior year, and to the sharp decline in oil prices starting in mid-2014. Both of these phenomena will lose momentum this year. UBS economists thus forecast full-year inflation at 0.4%.
EURCHF exchange rate dependent on monetary policy
The Swiss National Bank (SNB) is again ready to intervene in the currency markets in the event of any significant appreciation of the Swiss franc, which would jeopardize the fragile economic recovery. Alongside currency market intervention, negative interest rates remain the second instrument at the SNB's disposal to keep the franc from moving higher. The European Central Bank (ECB) should keep its highly expansionary monetary policy in place, thus an initial rate hike by the SNB from a current -0.75 to -0.50 percent is not expected until June 2018. UBS economists do not foresee the SNB raising interest rates above zero before 2019.
Global geopolitical uncertainties and the monetary policies of the SNB and ECB continue to affect the EURCHF exchange rate. Most short-term fluctuation in the currency pairing has been due to geopolitical events like Brexit, the US elections and, going back a bit further, the euro crisis. Thanks to SNB interventions, these events have not thus far caused any significant movement in EURCHF. ECB monetary policy is of more significance to the EURCHF exchange rate over the medium term. UBS believes the ECB will announce a phase-out of its bond buying program in late summer. This should support the euro. Pressure on EURCHF is set to subside noticeably for the first time since the euro crisis erupted, with the currency pairing being projected to rise toward 1.15 over the medium term. The election of Donald Trump as US president triggered a sharp rise in bond yields in the US, the Eurozone and Switzerland. The capital markets will need a while to digest this climb, so yields are expected to move sideways for the next few quarters.
Global politics are the biggest risk
Global politics pose the largest risk for the Swiss economy this year. An election victory by France's populist right-wing National Front party could negatively affect economic prospects for the Eurozone and throw international currency markets into disarray. Swiss foreign trade would suffer considerably from either development. The Trump presidency holds risks as well, given the potential for protectionist measures being implemented that affect Swiss exports to the US.
Nonetheless the Swiss economy should surprise on the upside if global economic growth is stronger than expected. This could occur if the Trump administration rolls out a comprehensive fiscal package. Swiss exporters would be among the beneficiaries. If a slowdown in the Eurozone economy is averted, key growth stimuli for the Swiss economy could result.
UBS Swiss economic forecasts
In developing the UBS CIO WM economic forecasts, UBS CIO WM economists worked 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.
UBS AG Switzerland
Daniel Kalt, UBS Chief Economist 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
Alessandro Bee, UBS Chief Investment Office WM
Phone +41 44 234 88 71, firstname.lastname@example.org