Credit Suisse Economic Forecasts for 2011

In 2011, Switzerland's economic growth is set to slow from its recent very dynamic pace. Credit Suisse economists attribute this to the fact that global fiscal packages are gradually nearing an end, and that monetary policy is increasingly reaching its limits. Private demand has been unable to fully compensate for these weakening stimuli. This is compounded by the fact that the long-term repercussions of the financial crisis will continue to impact on the real economy in the coming year. Credit Suisse economists therefore reiterate their view that the recovery will continue, but that it will get a little bumpier. In their fall forecast, they anticipate that growth in Swiss gross domestic product (GDP) in 2011 will be unchanged at 1.2%. For 2010, they now expect growth of 2.4%.

"In 2011, the world economy needs to learn how to stand on its own two feet again," says Martin Neff, Head of Economic Research at Credit Suisse, in his summary of prospects for 2011. The scope for further monetary and fiscal policy stimulation measures – which have enabled the recovery in the global economy to take place – has narrowed and the economic risks remain in place. The persistently high degree of volatility on financial markets is unsettling investors and curbing the propensity to invest in the real economy. Sentiment among consumers is subdued, especially in the US, and the vulnerability of the financial sector is the subject of repeated speculation. Even the possibility of government defaults cannot be ruled out, and we could also see the Chinese real estate market starting to falter.

Swiss Economy: Taking a Breather After the Strong Expansion

The aftermath of the financial crisis will continue to be felt across the Swiss economy in 2011. Despite the recent strong expansion of economic activity, Credit Suisse economists do not yet anticipate a sustained upturn. They forecast that Switzerland will enjoy positive economic growth in the coming year, but at 1.2% the rate of expansion will be weaker than in 2010 (2.4%). Although fears of a renewed recession in the US have been expressed in some quarters, the economists rule out the prospect of such a scenario for Switzerland – in particular because debt levels in Switzerland are not nearly as damaging to potential growth as in most other industrialized countries.

In the wake of the latest revisions to the national accounts, the Credit Suisse economists now forecast growth of 2.4% (previously +1.8%) for 2010. The recovery from the previous year's sharp fall has therefore been exceptionally dynamic. According to official data from the State Secretariat for Economic Affairs (SECO), the Swiss economy had already made up for the recession-led slump by mid-2010. Against this backdrop, the rate of unemployment is likely to ease to an average of 3.9% in 2010 followed by 3.7% in 2011.


Exports: Weak Demand and a Strong Swiss Franc

The brisk global recovery has had positive repercussions for Swiss exports in particular. Sectors such as watchmaking and metals, both of which suffered a massive setback in 2009, have once again been reporting double-digit growth rates in 2010. However, the Credit Suisse economists do not expect this pace of growth to continue: For 2011, they are therefore forecasting weaker but nonetheless positive growth in exports. A further appreciation of the Swiss franc would have an inhibiting effect on growth. The impact of exchange rates on Swiss exports nevertheless needs to be seen in context: The fact is, growth abroad is a far more important driver than the development of exchange rates. In addition, Switzerland exports fewer and fewer price-elastic goods and services. At the same time, however, it is benefiting from cheaper inputs from abroad. According to Credit Suisse forecasts, export revenues will rise by 3.5% in 2011 (2010: +8%).


Consumption: Falling Immigration and Higher Dues Will Hit Purchasing Power

At 1.2%, growth in consumption will also be weaker in 2011 than in 2010 (1.5%) as immigration provides less of a fillip than in previous years. What's more, purchasing power will be hit in 2011 by the rising dues for the value added tax, unemployment insurance, income replacement, as well as health insurance. Although job security is likely to continue improving, the decline in the rate of unemployment will probably be somewhat weaker in tandem with the slowdown in economic growth.


Investment in Plant and Equipment Caught Between Cheap Money and Uncertainty

The backdrop for investment in plant and equipment is characterized on the one hand by record-low interest rates and on the other by uncertain prospects and low rates of capacity utilization. These favorable financing conditions help support investment activity, particularly replacement and rationalization investment. Capacity expansion is only taking place in isolated instances, however. Earnings prospects remain too uncertain and general capacity utilization is too low. According to Credit Suisse forecasts, the tentative growth in investment in plant and equipment will therefore pick up only slightly in 2011 (2.5% versus 1.5% in previous year).


Construction Investment Declining – No Real-Estate Bubble

Construction investment in Switzerland will fall slightly in overall terms in 2011. While residential construction will consolidate at a high level despite the decline in immigration, commercial construction is likely to slow. A real-estate bubble is currently unlikely in the eyes of Credit Suisse economists, however. Although local signs of overheating can be detected, it would be inaccurate to describe the market as being comprehensively overvalued. The above-average growth of mortgage volumes – measured relative to GDP – ultimately reflects pent-up structural demand in the residential property market.


Annual Inflation Low, But Not Negative

Credit Suisse economists expect inflation to average 0.6% this year and 0.7% next year. The current, low rate of inflation is a delayed repercussion from last year's recession. Many companies have been unable to raise prices owing to weak demand, and at the same time wages have seen only minimal increases given high unemployment. On top of that, rent increases have been subdued due to the low interest rates resulting from the Swiss National Bank's expansionary monetary policy. Given the major weighting attached to rents in the national index of consumer prices, moderate rent increases are a guarantee of low rates of inflation. Credit Suisse economists believe deflation is a highly unlikely prospect.