PROJECT LINK FALL MEETING NEW YORK, OCTOBER 2015 COUNTRY REPORT : SWITZERLAND Délia NILLES 1 1. Recent Trends and Selected Key Forecasts 1.1 Recent trends Switzerland's real GDP grew by 1.9% in 2014, but growth rate fell to 1.2% during the first half-year of 2015. Public consumption and investments in capital goods provided support for GDP growth as they increased by 3.1% and 3.4% respectively. Private consumption expenditures however resulted in a modest growth rate of 1.2% during the same period. While domestic demand remained nevertheless robust during the first half-year, exports have been severely hit by the sharp rise of the value of the Swiss franc after the Swiss National Bank (SNB) took the decision on January 15 to discontinue the minimum exchange rate of CHF 1.20 per Euro (introduced in September 2011). On top of low demand coming from EU countries (about 60% of Swiss exports go to the EU), Swiss export products were, from one moment to the next, about 20% more expensive. The mood among Swiss companies sharply declined immediately after January. Orders received by the manufactory sector fell by about 6% during the first half-year. From the last quarter of 2014 to the first quarter of 2015, the business conditions index fell by more than 10 points and the index for incoming orders by more than 20 points, as shown in the figure below. 10 Industrial Business Tendency 0-10 January 15 : discontinuing of minimum exchange rate -20-30 -40 2015:01 2015:02 2015:03 2015:04 2015:05 Business conditions Orders received 1 CREA Institute, University of Lausanne, CH-1015 Lausanne. crea@unil.ch
2 Imports of goods (excluding non-monetary gold and valuables) decreased by nearly 4% (yoy) during the second quarter, which is the largest decrease since the third quarter of 2009 and which shows that economic activities slow down markedly. According to the Swiss Customs Administration, exports of goods fell by 7.4% on average during the months of July and August and imports by 13%. Exports to Euro zone countries fell by 8.7% during the first eight months of 2015, but exports to the US increased by 6%. Foreign trade prices have fallen sharply due to the appreciation in the Swiss franc after mid-january. So far, the labour market behaved quite well. Employment grew by 1% on average during the first half-year, but only thanks to the services sector (1.3%). Employment in the industrial sector decreased slightly. Unemployment rate remains around 3.2% since April, but an increase is expected by the end of the year as the Swiss economy is on the way to decelerate, as shown in the figure below. Although, over the summer, the mood among Swiss companies has stabilized, exporting companies, in particular SME's, continue to struggle against price and margin pressures. The depreciation of the Swiss franc against the Euro (about 8% since the abandonment of the currency ceiling by the SNB) is not strong enough to stop the downturn of Swiss industry, all the more so because the Swiss franc has at the same time appreciated against several emerging markets currencies. The most recent Purchasing Manager's Index (PMI) has fallen below the growth threshold of 50 points. The sub-index for output in September fell by13.3 points, for the first time since February, and is now also below the growth threshold. As to interest rates, they remain quite low. The SNB announced mid-september that it leaves monetary policy unchanged. It considers that the Swiss franc is still significantly overvalued. The negative interest rates, introduced at the same time as the discontinuation of the minimum exchange rate, should help to lower the pressure on the Swiss franc. 104 CREA's Business Indicator for the Swiss Economy 103 102 101 100 99 equilibrium 98 97 96 98 00 02 04 06 08 10 12 14
3 1.2 Selected components Private consumption has slowed down markedly in 2014. Its growth rate dropped from 2.2% in 2013 to 1.3% in 2014 and reached 1% during the second quarter of 2015. This is well below long term growth estimated at about 1.6%. The latest consumer confidence sentiment shows that consumer expectations with regard to future economic development fell drastically in June and reached the lowest level since end 2011. Swiss consumers are clearly more negative in their assessment of the development of their financial situation and less positive about job security. The latest UBS consumption indicator increased in August but remains below the values recorded in 2012-2013. So far employment growth supports private consumption, but this may change because of the more pessimistic expectations concerning future employment. The declining trend in private consumption is reflected in the development of retail sales. The latter fell by 3% in the first half-year of 2015, of which 0.8% for food products, 6.8% for communications and 4.1% for leisure and culture. However, an increase in new car sales is recorded in the first two quarters of 2015, which may be related to the discounts granted by importers following the abandonment of the minimum exchange rate. As to the development of private consumption in the coming months, a further slowdown is expected in consumer spending. Indeed, the gloomy labour market outlook accompanying the expected downturn in economic activity in the coming quarters and a stagnation in real wages should dampen private consumption. In the industrial sector, the outlook has significantly deteriorated since mid-january. If some branches still recorded an increase in production in January 2015, it is no longer the case for the months of February and March, during which only food and tobacco industry saw its production increase (1.3%). All other branches of manufacturing industry suffered a decline in their production. Production of manufacturing decreased by 4.6%, of which 17.6% for electrical equipment, 9.5% for transport equipment, 7.8% for the chemical industry and 6.3% for the pharmaceutical industry. Production of intermediate goods fell by 7.5% in the months of February and March, production of the investment equipment by 3.3%, production of durable consumer goods by 3.4% and for nondurables by 3.6%. As orders received decreased by 5% during the first quarter of 2015 - the biggest drop since the first quarter of 2012 -, the future looks difficult for the Swiss industry in the coming months. This is confirmed in particular by the drop in orders of intermediate goods ( 9.6%) used in the production process. The PMI purchasing managers index fell significantly below the value of 50 in February (47.3), recovered until September (49.5) but remains in the area of decreasing production. Recently, the output index dropped sharply from 62.5 in August to 49.1 in September. The export indicator for SMEs is at its lowest level since first calculated in 2010. According to a survey among 350 SMEs, more than 50% of SMEs announced that they have lost orders because of the strong Swiss franc. They remain however quite optimistic as they assume that their exports to the United States will continue to grow. They also expect that the negative effects of the strong franc are partially offset by the recovery in the Euro area.
4 Construction investment also recorded a downturn during 2014 and decreased in the last quarter of 2014. Activities of the main construction sector continued to decline in early 2015, although one would have expected that this sector, turned towards the domestic market, should suffer less. According to recent figures, overall production has decreased by 3% (yoy) during the second quarter 2015, with 8.3% in main building. Building projects as well as worklists declined sharply and construction activities in 2015-2016 look gloomy, especially as the expected slowdown in the Swiss economy with a probable rise in unemployment and falling wages should also impact partly the construction sector. For the year 2014, exports of goods (excluding non-monetary gold, valuables and transit trade) rose by 4.1%, but the underlying growth turned negative in the fourth quarter of 2014 when exports of goods fell by 1% compared to the previous quarter. The soaring franc, after the abandonment of the minimum exchange rate, will have a significant negative impact on Swiss exports. In the first eight months of 2015, exports of goods fell by 3.4%, according to the figures from the Federal Customs Administration. The largest decreases were registered by the chemical and pharmaceutical industry, with 4.8%, and the machine and electronic industry with 6%. During the same period, Swiss exports to the EU fell by 6.3% and those to the Euro area by 8.7%. Exports to China also decreased ( 3%) but those to the US increased by 6.2%. In the machine industry (15% of Swiss exports), orders from abroad fell by 20% and overall confidence index is at its lowest since 2011. There is a strong pressure on profitability because about two-thirds of companies have adapted their prices and some plan to cut jobs. Given the general slowdown in the Swiss economy, imports of goods decreased by 8% during the first eight months ( 19.6% for Augut only). In connection with the downward trend of production, imports of raw materials and semi-products fell by 9.8% during the same period, those for machines and equipment by 4.2% and those for consumer goods by 6.2%. The labor market remains strong for the moment, with employment up by 1% in the first quarter of 2015, thanks to the services sector (1.3%), the employment of the industrial sector stagnated (0%) and the manufacturing industry recorded a decline in employment ( 0.3%). As companies are still in a phase of adjustment to the strong franc, the impact on the job market will intervene probably at the end of the year. The first signs of a trend reversal can be seen in the decrease of the job vacancy index, 8.3% in the second quarter, and in the index for employment outlook, 1.4%. In the industrial sector, the number of vacancies fell by 24% in the second quarter and in the services sector by 2.9%. 2.5%. For the index of employment outlook, the figures reach 3.7% and 0.5% in the industrial and in the services sector respectively. The number of companies that use reduced working hours has increased markedly. Given the exepcted development of the Swiss economy in the coming months, the outlook for the labour market is getting darker. Over the first nine months of 2015, the general price level declined by 1.1%. The price of the country's goods and services increased in the same period by 0.2%, but those of imported goods and services decreased by 4.8%. The price index for private services was the only one to rise (0.5%). The
5 index of oil products fell by almost 18% and the core inflation rate fell by 0.3%. For the year 2015, the general level of prices will probably decline and inflation should remain close to zero in 2016-2017. As for interest rates, they are and will remain at historically low levels reached at the moment. An upward trend can be seen in 2017, but should not differ much from current levels. 2. Assumptions on national policy and uncertainties National policy assumptions relate primarily to monetary policy. In September 2011, the Swiss National Bank had decided to introduce a minimum exchange rate of CHF 1.20 per Euro. It was a period of extreme overvaluation of the Swiss franc and the purpose of this exceptional and temporary measure was to protect the Swiss export sector and thus the Swiss economy as a whole. The SNB intervened repeatedly in the foreign exchange market by committing substantial amounts to ensure the fixed exchange rate against the Euro. From July 2011 to January 2015, the foreign currency investments of the SNB have increased by 170% and reached 508 billions in January 2015 (about 80% of Swiss GDP!). Sight deposit accounts of domestic banks passed from 29 billions in July 2011 to 354 billions in January 2015. On January 15, the SNB decided to discontinue the minimum exchange rate. At the same time it lowered the interest rate on sight deposit account balances to 0.75% and the target range for the 3- month Libor to between 1.25% and 0.25%, still valid at the present time. Even if the measure introduced in September 2011 was known as temporary, the SNB's decision took everybody by surprise, but of course, to make the policy work, it could not have been otherwise! In a couple of seconds the Euro fell temporarily to around 0.965 CHF and it took several months before the Euro started to appreciate slightly against the CHF. At the present time the Euro is about 1.09 CHF (see figure).
6 When the SNB announced that it would discontinue the minimum exchange rate, it also announced that, if necessary, it would remain active in the foreign exchange market in order to take account of the impact of the exchange rate situation on economic conditions. This seems to have happened, because from January 2015 to June, foreign currency investments as well as sight deposits of domestic banks have continued to increase, by about 4% respectively 2%. Despite the measures taken by the SNB, the nominal rate of the Swiss franc has appreciated on average by about 4% compared to all the currencies of 40 major trading partners between January and June, 4% against the Euro. Only from July on did the Swiss franc loose some strength against the Euro. It is of course difficult to predict the evolution of the franc, but given the developments in the world economy and especially that of the Euro area and the EU, the nominal Swiss franc will likely continue to appreciate in 2015, then depreciate slightly in 2016-2017. At the present time, there is no danger of inflation and the SNB will probably keep its monetary policy unchanged. It expects inflation to move back into positive territory at the beginning of 2017. Global economy reported a moderate growth during the first two quarters of 2015. The US economy gained momentum, but the Euro area recorded slow and fragile recovery. Uncertainty regarding the Chinese economy has increased and the slowdown of the economic activity in China increased concerns about an economic downturn. The devaluation of the Yuan against the US Dollar caused uncertainty on the international financial market and renewed turbulence in financial markets could have a major impact on Swiss monetary policy. The continued strong Swiss franc remains a challenge for many companies, because they are under pressure to remain competitive on the international markets. 3. In Short The domestic sector moves in slow motion in 2015 and the external sector suffers from the effects of the strong franc. All industrial indicators, such as orders received, production and production capacity utilization are at very low levels, although a slight improvement is observed in August. Indeed, manufacturers do not report other deteriorations. The recent index of consumer sentiment, fell drastically and reached the lowest value since January 2012. One may mention the very negative sentiment about the safety of workplaces. Households feel that the moment is less favourable to make major acquisitions, which is a sign of lack of confidence. Pessimism also prevails among exporting companies and especially SMEs. The recent export indicator fell well below the growth threshold for the third quarter and forecasts are negative for all branches, except the ones for consumer goods. As a consequence, the Swiss GDP is expected to decelerate significantly in 2015, with only 0.8% growth. The weak growth is likely to continue until 2016 when expected growth rate should be slightly higher with 1.5% but still below the long-term growth, estimated at around 1.8%.
7 700000 mio. CHF Real GDP 650000 600000 550000 500000 450000 400000 350000 1985 1990 1995 2000 2005 2010 2015 GDP Equilibrium CREA's Forecasts for the Swiss Economy ** (%Change * ) Aggregate demand 2014 2015 2016 2017 Private consumption 1.3 0.8 0.1 0.6 Public consumption 1.3 1.2 1.1 1.0 Equipment investment 1.3 0.2 3.1 1.5 Construction investment 3.3 1.0 2.0 1.0 Domestic demand 1.5 0.8 0.3 0.6 Total exports 6.9 2.5 2.0 7.2 Exports of goods 4.0 3.4 1.6 6.8 (excluding n.-m. gold, merchanting, valuables) Exports of services 2.4 0.3 3.4 8.2 Global demand 2.3 0.7 0.7 3.5 Total imports 8.1 3.4 0.6 5.8 Imports of goods 1.7 5.5 1.7 6.8 (excluding n.-m. gold, valuables) Imports of services 5.1 2.8 2.7 3.3 GDP 1.9 0.8 1.5 2.3 Prices, wages, employment GDP deflator 0.7 0.5 0.9 0.6 Consumer price index 0.0 0.9 0.5 0.5 Nominal wages 0.8 0.7 0.7 0.7 Real wages 0.8 1.6 0.2 0.2 Employment 1.7 0.7 0.1 0.5 Unemployment rate 3.2 3.4 4.1 4.4 Interest rates Short term interest rate 0.03 0.01 0.73 1.24 Long term interest rate 0.69 0.00 0.52 1.29 Mortgage rate 2.69 2.63 2.75 3.63 * Except for unemployment rate and interest rates ** Forecasts are from May 2015.