KOF - Broad-based Upturn Mittwoch, 28. März 2018 - 10:07

The international environment

Last year can be described as a successful one for the global economy, even though the pace of this upturn slowed somewhat towards the end of the year. World trade surged by 4.5% in 2017 following a five-year period during which growth had averaged around 2%. The prices of energy and other commodities rose over the course of the year without severely affecting consumer prices. This year the Federal Reserve, the US central bank, is expected to raise interest rates by about the same amount as it did last year. Although the European Central Bank (ECB) will probably reduce the net volume of its bond purchases to zero this year, it is likely to leave interest rates on hold until 2019. KOF expects the strong growth in the global economy to gradually weaken over the forecast period.

The Swiss economy

The Swiss economy is currently performing extremely well. Internationally and domestically focused sectors alike are growing strongly. KOF reckons that the main reasons for this positive trend are the improved economic situation of major trading partners and the depreciation of the Swiss franc against the euro. This latter factor has enabled exporting companies to widen their profit margins. KOF expects growth in gross domestic product (GDP) for the current year to be 2.5%, which would be higher than its last forecast in December 2017. Some of this increase, however, has little to do with the actual performance of the Swiss economy and can be attributed to the fact that Switzerland hosts the headquarters of some of the major international sports federations and associations (IOC, FIFA etc.). A fair chunk of the license fees from large-scale international events such as the Olympic Games in South Korea is included in Switzerland’s GDP figures. KOF estimates that this factor accounts for roughly 0.3% of Switzerland’s GDP. The absence of such major sporting events next year means that economic growth will come in lower. Adjusted for the impact of sporting events, however, the GDP growth rate forecast for 2019 is not much lower than that for this year.

Given this exceptional effect, it is not entirely surprising that employment growth is fairly modest and that the unemployment rate – as defined by the International Labour Organization (2018: 4.6%) – will fall more slowly than would be expected for this level of GDP growth. Consequently, there is no significant pressure for wage increases, and the impact on labour costs remains moderate. However, the Swiss franc’s depreciation against the euro and the slightly higher price of oil are likely to push up inflation to 0.7% this year. Nonetheless, it should remain at this low level and subsequently even weaken slightly. From an inflationary perspective, there is thus no need for a more restrictive monetary policy. Given the current situation, KOF expects the Swiss National Bank to replicate ECB’s monetary policy in order to maintain the usual interest-rate differential between franc- and euro-denominated investments.

Capital spending on machinery and equipment will grow robustly this year, as will construction investment. The latter, however, is expected to weaken next year, as rising interest rates are likely to hit construction investment. Swiss exports are expanding and will continue to do so for some time. Demand for imports will also probably remain high over the coming months.