Swiss economy to finally overcome weakness caused by sharp appreciation of Swiss franc

Year Ahead 2018 regional outlook: Switzerland

 

29 November 2017

This article is part of the UBS House View Year Ahead 2018, our yearly outlook on markets. You will find investment ideas and portfolio implications in the full report.

Robust growth

Our outlook for the coming year is cautiously optimistic. First, we expect the Swiss economy to benefit from the franc’s depreciation since July. Second, the robust global economy should boost Swiss exports. Third, many Swiss companies have reduced their operating costs since the franc’s sharp appreciation in 2015 and have regained competitiveness, as reflected by the purchasing managers’ index, now at a post-2011 high. We forecast Swiss GDP to advance by 1.8% in 2018, which should also push Swiss unemployment rate below 3% at some point next year for the first time since 2012.

Consumer prices, in our view, will climb 0.5% next year on the back of the oil-price rebound of the last 18 months. While the impact of higher oil prices will eventually fade, the depreciation of the Swiss franc against the euro will boost import prices. The gradual recovery of the economy should also lead to slight upward pressure on prices and support the inflation rate in the coming year at 0.6%.

We expect a modest Swiss franc depreciation in 2018. The more evident it becomes that the ECB will indeed halt its bond-purchase program, the more demand for the franc will fade. We expect the Swiss National Bank (SNB) to maintain a passive short-term stance, creating further depreciation potential for the franc. But any fall in its value is likely to be modest, in our view. We estimate EURCHF purchasing power parity at 1.21, and as long as the Eurozone’s structural problems remain we don’t expect the pairing to trade consistently above fair value.

Housing market: vacancies rising further

In 2017, the vacancy rate increased markedly for the fourth year in a row. According to the Federal Statistical Office, almost 65,000 homes were unoccupied on June 1. The greater number of vacancies stems primarily from the large increase in vacant rental apartments, and the figure could continue to climb for two reasons.

First, population growth, as in 2017, could again be considerably lower than the average of the last decade. Net immigration looks to be around 60,000 people next year, meaning that Switzerland's population would rise by less than 1%.

Second, the availability of housing is still expanding. The number of building permits fell only slightly year on year in 2017, so we can expect around 50,000 new homes again next year. In view of falling demand, the large number of new-build homes will likely not be absorbed. We anticipate an increase in the vacancy rate from 1.5% to 1.6% by the middle of the year. In the residential rental market, we expect the rate to actually climb to 2.5%–3.0%.

When it comes to purchase prices, stagnation could well continue. Financing conditions should remain extremely attractive, keeping demand for residential property high. Greater economic growth and rising nominal purchasing power should also support the market. But we expect the pressure of competition from vacant rental apartments to increase, particularly in the case of condominiums in old buildings. For that reason, condominium prices could slightly lag those of single-family homes.

Holiday homes: better short-term outlook

Vacation apartment prices in the Alpine region have failed to keep pace with national Swiss price behavior in recent years. On the one hand, the strong franc has kept foreign buyers at bay, and on the other, there is a stubborn surplus of holiday flats in many Alpine tourist destinations. The outlook seems to be improving slightly. An improving economic outlook and a weaker Swiss franc should underpin the demand for holiday housing, while new regulation that places obstacles in the way of second homebuilding to prevent a glut of empty beds, should keep new supply limited.

Commercial spaces: potential to bottom out

The Swiss electorate's rejection of corporate tax reform and overall low employment growth weigh on the demand for office spaces. Shopping abroad and the increasing role of online shopping still challenge the retail market. As a result, the amount of empty commercial surfaces continued to grow in 2017. The expected economic upswing in the coming quarters will likely not prevent a further increase, but if the economy continues to perform well, supply and demand should return to a better balance in the medium term. Although an accelerating commercial market is still in the distant future, the commercial market could approach its low late next year.

Listed market: commercial focus preferred

Swiss listed real estate names provide interesting payouts with a spread over government bonds of more than 3%. But slightly higher interest rates, due to less expansive central banks and falling rents, limit sector upside. Among real estate stocks and funds, we slightly prefer those that focus on commercial surfaces. These names could profit most from a lasting economic upswing.

For investment ideas, portfolio implications and more regional content, subscribe to our newsletter and receive your free PDF copy of the full UBS House View Year Ahead 2018.