Credit Suisse: Political “noise” does not impress companies Dienstag, 13. Juni 2017 - 09:00

In the latest issue of "Monitor Switzerland", Credit Suisse economists explore the question of why forecasts made following political events often prove too pessimistic. They show that widespread political uncertainty – as measured on the basis of media reports – is not a good forecasting tool for the economy. In fact, companies are fairly good at weighing up the likelihood of political decisions being implemented. Furthermore, an analysis by the Credit Suisse economists shows that in the recent past the Swiss National Bank (SNB) has on each occasion responded to political uncertainty with increased intervention in the foreign exchange markets, thereby lessening the impact on the real economy. The Credit Suisse economists are leaving their 2017 growth forecast for the Swiss economy unchanged at 1.5%. For 2018 they expect growth to accelerate slightly to 1.7%. Inflation is likely to be 0.5% in both years.

Political and monetary policy decisions such as the acceptance of the Mass Immigration Initiative (MII) and abandonment of the EUR/CHF minimum exchange rate by the Swiss National Bank (SNB), as well as geographically more distant events such as the Brexit vote in the UK and Donald Trump's election in the US, have created quite a stir in the media. The response shown by Swiss companies was nevertheless extremely calm in each case. Indeed in the recent past there has not been any significant correlation between the development of investment growth and the Political Uncertainty Index calculated by the Credit Suisse economists, which counts the number of media reports on the topic concerned across the Swiss media landscape. 

Swift Reaction to Seemingly Never-Ending Strength of Swiss Franc

Even so, it would be wrong to assert that policy decisions are irrelevant to corporate behaviors. "What matters is whether political decisions actually alter the fundamental environment for companies or not," says Oliver Adler, Chief Economist for Switzerland at Credit Suisse. Although political events have a direct impact on sentiment within the corporate sector, the reality is that companies wait until the consequences can be gauged before implementing concrete measures – as is abundantly clear from business surveys. "If a political decision is difficult to take and implement, and also has an unclear time horizon – which is frequently the case when it comes to populist demands in particular – its impact on the real economy is likely to be correspondingly minimal, despite the fact that it is dominating the headlines," he explains. The strongest reaction on the part of companies was seen after the abandonment of the minimum exchange rate, which the corporate sector had previously regarded as immutable according to surveys. At the same time, a detailed analysis shows that the "Swiss franc shock" of 2015 had a greater impact on small businesses than on large corporates. 

SNB: Awaiting a Less Expansionary ECB

The Credit Suisse economists also conclude that in times of heightened political risk the SNB has on each occasion intervened particularly actively in the foreign exchange market in order to weaken the Swiss franc. The central bank is estimated to have spent approximately CHF 143 billion on intervention since February 2015, much of this in connection with political events. It is true that Emmanuel Macron's victory in the French presidential election has reduced political uncertainty in Europe – temporarily at least – and therefore the volume of intervention too. Yet according to the Credit Suisse economists, the SNB is unlikely to halt its foreign currency purchasing entirely over the coming months: Even in relatively untroubled times, it has historically spent around CHF 1-2 billion on currency intervention every week. "The SNB will probably not make any changes to its current intervention policy before the start of monetary policy normalization in Europe, which is likely to be announced in September," says Adler. "Against that backdrop, negative interest rates are likely to remain in force until at least the end of 2018." The Credit Suisse economists expect the SNB to ramp up its purchasing again if political events such as the "Brexit" process spark a renewed rise in political uncertainty and therefore demand for the Swiss franc. However, the SNB is likely to be relatively relaxed about any rise in the value of the Swiss franc on the back of improved expectations for Swiss growth. 

Gradual Acceleration in Economic Growth

The prerequisites for a further recovery of the export economy are good, according to the economists at Credit Suisse. In particular, the positive economic trend in European purchasing countries should provide a tailwind. At the same time, the domestic economy remains robust in the view of the Credit Suisse economists – even if it is only slowly gaining traction. Consumer sentiment is brightening, though this is a slow process given the sluggish improvement in the labor market – one of the key influencing factors. Furthermore, the era of rising purchasing power on the back of falling prices is over. While immigration is likely to remain supportive to the growth in consumption, its contribution to growth is set to contract. 

The Credit Suisse economists also expect little acceleration in corporate investment: Although favorable financing conditions and the constant pressure to rationalize speak in favor of a sharper increase, the ongoing difficult revenue situation is limiting potential. Net operating surplus – an approximation of profits – still lies at the low level of 2009. Overall, however, the Credit Suisse economists believe the Swiss economy is in a better state than it would appear given what at first sight seems a disappointingly poor 0.3% quarter-on-quarter increase in economic output in Q1 2017 (according to the State Secretariat for Economic Affairs SECO). The economy is likely to grow by an average of 1.5% in 2017, and by 1.7% next year. Average annual inflation should amount to 0.5% in both years. 

The publication Monitor Switzerland is published quarterly and is available online in German, French, Italian, and English at: https://www.credit-suisse.com/research (Swiss Economy). The next issue will be published on September 19, 2017.