CS: Swiss Economy: Recovery From a Serious Slump

The global recession is abating and the financial markets are on the way to recovery thanks to far-reaching interventional measures. Packages to stimulate the economy are also boosting demand in the real economy across the globe. Additional growth impulses for the global economy are also emanating from increases in stock levels and production capacity that had been heavily scaled back in anticipation of a prolonged recession or due to financing difficulties. Some economies, in particular export markets of importance to Switzerland such as Germany and France, have already returned to a moderate growth path.

Swiss Economy to Grow Again in 2010

The prospects for the heavily export-oriented Swiss economy are brightening as the global recession begins to fade. Both the USA and the Eurozone will show signs of positive economic growth during the coming year, according to Credit Suisse economists. Credit Suisse expects Switzerland to follow the trend and grow by 0.6% in 2010 (no change from the forecast made on February 11, 2009).

However, the economists at Credit Suisse continue to anticipate a decline of 2% in the real gross domestic product for 2009. Thus, the course taken by the recession in Switzerland was mild in comparison to other countries, despite the various gloomy outlooks. Firstly, the Swiss export economy did not slump as much as those of the US and Germany, for instance, thanks to a high share of less cyclical products. Secondly, the slump was softened by the relative robustness of the domestic market.

Recovery but no Broad Upswing

The positive growth in the coming year, however, is not yet the start of a broad upswing, according to Credit Suisse economists. 2010 will see the economy recover a little from its serious fall in the previous year. Under certain circumstances, the extent of recovery may even be greater than current forecasts indicate. This is because the drop in demand and the many gloomy forecasts led to such a rapid and severe cutback in production and stock levels that they now need to be replenished to satisfy the recovery. However, production levels will still be a far cry from their pre-crisis status. Economic growth will therefore remain below potential growth for the time being.

The expansion of the Swiss economy is too weak to prevent a further rise in unemployment. The economists at Credit Suisse therefore anticipate the rate of unemployment to rise incrementally until mid-2010. The average annual employment rate will be 5.2% in 2010. This is the highest level since 1997, when Switzerland experienced an unusually strong rise in unemployment from a very low level (0.5%) in 1990. Although today's higher unemployment rate is driven by recession, its higher level is a result of the rise in structural unemployment.

Consumption will provide support in 2010, but hardly any impetus toward economic expansion

Consumption will suffer under the burden of declining job security. It will, however, continue to provide weak growth impulses during 2010 (+0.6% in comparison to the previous year). After all, two-thirds of private consumption comprises goods and services that, in the event of a decline in job safety, are not immediately disposed of or are indeed indispensable. Additionally, loss of income is cushioned by unemployment benefits, which helps to secure basic consumption. Furthermore, Switzerland's households are not overindebted, and basic consumption will continue to rise in 2010 due to immigration.

Government consumption will also contribute to economic growth in 2010, as it did in the previous year. An increase in the workload placed on unemployment centers and social services and a rise in personnel costs on account of measures to stabilize the economy will be the cause of a 1% increase in federal consumption.

Exports Stabilize after Slump – Initial Growth Impulses in 2010

According to the forecasts of the economists at Credit Suisse, the export statistics for 2009 will show its heaviest setback, at -12.7%, since the series of measurements began in 1949. This spectacular value does, however, distort the view of the actual trend. The slump in export levels had already begun at the end of 2008. Export activity has meanwhile stabilized, albeit at a low level. The negative annual growth rate of 2009 will therefore be oversubscribed due to a base effect.

The spark igniting recovery will come to Switzerland from abroad in the same way the recession was imported. Thanks to its competitive capacity, the Swiss export economy can benefit immediately from the awakening demand in export markets. The economists at Credit Suisse anticipate an export growth rate of 5.0% for 2010. The export motor will be running once again, albeit at a slow pace to start with.

Capital Spending on Machinery and Equipment Declining until 2010

Many companies are facing empty order books and uncertain order prospects in the aftermath of the turbulence. Furthermore, the prospects beyond 2010 are still too vague for substantial investments. The majority of investments made in 2010 will therefore be made in replacements. The demand for expansion investments will remain weak for an even longer period. Swiss industry is currently at a similarly low capacity level to the recession of 1976. The decline in capital investment will therefore slow down in 2010 but continue nonetheless (-1.5% in comparison to -7.4% in the previous year).

Inflation Slowly Rising

The overall rate of inflation in Switzerland this year will be negative (forecast: -0.4%). However, the decline in inflation is limited to a just a few items, mainly goods based on crude oil. The price of crude oil has meanwhile recovered from its fall and will become a driver of inflation in 2010. Furthermore, the factors currently exerting a negative impact on inflation will lose influence as production activity improves. In the course of the recovery, inflationary potential may materialize on account of the doubling of the money supply and near zero percent interest rates. The money supply will doubtlessly need to be reduced and interest rates increased. The trick is, however, to do it at the right point in time. The Credit Suisse economists anticipate a moderate rise in interest rates of around 50 base points for the coming year in view of the still very fragile scaffolding supporting the boom. The average rate of inflation for 2010 is forecast at 1.0%.

Distorted 2010 Renders Reliable Prognosis for Subsequent Years Impossible

2010 will be distorted due to the massive slump of the previous year and governmental stabilization measures, therefore begging the question as to whether the private sector will be able to compensate for the gap caused by the loss of governmental growth impulses in 2011. The economists at Credit Suisse are therefore intentionally refraining from making a forecast for the subsequent years. Martin Neff, Head of Economic Research Switzerland at Credit Suisse, says: "It is currently simply impossible to make a reasonably reliable and serious forecast for 2011, and to do so would be careless. Nevertheless, Switzerland can be among the winners in any economic scenario. The country's strong competitive capacity and the fact that it took on less ballast in the form of public debt during the crisis than other national economies are ideal basic conditions.

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