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UBS expects continuing strong growth in 2008 for the Swiss economy
The Swiss economy remains in good health. Economic growth is broadly based, and leading indicators point to continuing robust economic expansion in 2008. However, the outlook for 2009 has weakened, owing to the slowdown in the global economy and the appreciation of the Swiss franc. Accordingly, UBS still expects the economy to grow 2.3% in 2008, but has lowered its forecast for 2009 to 1.4%.
In recent months, the Swiss economy appears to have remained almost impervious to the slowdown in the US economy and the turbulence in the international financial markets. Real GDP grew 3.6% year-over-year in Q4 2007. This is the fastest rise since Q3 2000. With full-year growth of 3.1%, 2007 was the fourth year in a row with growth above 2%.
Growth is broadly based and the economic indicators point to continuing robust economic expansion in 2008. The positive trend on the labor market, in particular, generates optimism. The strong increase in employment and rises in real wages should lend further support to private consumption. However, the high export growth of recent years is unlikely to continue. According to UBS Wealth Management Research estimates, the slowdown in the US economy is likely to persist well into 2009. Although only around 10% of exports go to the US, demand from other regions is likely to slow over time due to knock-on effects. Developments in Switzerland's biggest trading partner, the eurozone, are of particular importance. UBS Wealth Management Research expects that economic growth in the eurozone will slow to 1.7% in the current year and 1.2% in 2009. A further consideration is that the rise in risk aversion among investors as a result of the upheavals on the financial market is likely to maintain upward pressure on the Swiss franc in the coming months, which will adversely affect the price competitiveness of Swiss exporters. Finally, the credit crisis and its negative impact on the financial sector should weigh on growth in services exports. As these effects generally take some time to develop their full impact, a sudden drop in export demand is unlikely. However, these adverse effects will gain in importance over time, and will make themselves felt in the export sector in 2009 in particular. While UBS Wealth Management Research still expects the economy to grow 2.3% in 2008, it has therefore lowered its forecast for 2009 from 1.8% to 1.4%.
Consumer prices should also ease in coming months in line with the expected economic slowdown. Much of the recent increase in prices has been due to volatile energy prices. This effect should ease over the course of the year, partly as a result of the expected Swiss franc appreciation. UBS Wealth Management Research accordingly expects inflation to drop to 1.4% in 2009 from the 1.8% forecast for 2008. This would give the Swiss National Bank (SNB) the scope it needs to lower interest rates. UBS Wealth Management Research expects target rates to be cut by 25 basis points in each of the three quarters from September 2008 onwards, which would ease the upward pressure on the franc that followed the sharp interest rate decreases in the US.
Daniel Kalt, Head of Swiss Economic Research
Tel. +41-44-234 25 60
Felix Brill, Economic & Swiss Research
Tel. +41-44-234 35 54
UBS publications and forecasts for Switzerland: www.ubs.com/economicresearch