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#Market Strategy — 15.01.2018

Switzerland: the 2018 economic outlook

Roger Keller

Healthy conditions:

2017 offered a mirror image to the economic developments of the previous year. In 2016, growth progressively decelerated and the year finished with a fourth quarter contraction of 0.1% compared to the third quarter.

2017 witnessed opposite developments with the Swiss economy progressively gaining strength. In the third quarter, its growth rate versus the previous quarter reached its strongest pace since the fourth quarter of 2014. Contributions to the good figure were varied, coming from consumption, investment spending and net exports. In the end, real GDP is likely to have expanded by 0.9% in 2017.

A promising outlook:

For 2018, stars are well aligned. The manufacturing PMI (Purchasing Manager Index) is at its highest since July 2010 and the services PMI also stands at very high levels, above 60. The KOF (economic institute Konjunkturforschungsstelle) composite indicator of the cycle is at its best level since June 2010.

Switzerland takes advantage of a currency that has lost nearly 6% since the start of 2017 and of the solid conditions of the world economy, particularly of the euro area, which is the destination of 50% of its exports (the US makes up 15% of total exports and Greater China 8%).

Behind exports, fixed investment will be the second fastest growing GDP component, thanks to good corporate profitability, which allows the self-financing of capital expenditure, and because of the need to defend or improve competitiveness.

Consumption will expand a little faster in 2018 than in 2017 thanks to a further decline in the unemployment rate and to rising incomes.

All in all, real GDP should grow by 1.8% in 2018 and should keep expanding at a healthy pace in 2019, as the world economy is expected to remain well supported.

Inflation on a moderate uptrend

Switzerland left deflation behind in 2017, with a rise of the consumer price index from -0.4% in 2016 to 0.5%. Rising oil prices, a weakening of the franc and higher levels of capacity utilisation are behind this improvement. Inflation should keep strengthening in both 2018 and 2019, to 0.6% and 0.9% respectively.

Monetary policy will remain set to “keep the attractiveness of Swiss franc investments low”

The Swiss National Bank (SNB) notes in its latest monetary policy assessment that the overvaluation of the franc has continued to decrease. It has done so not only against the euro but, more recently, also against the dollar. It believes that “this development is still fragile” and that the franc “remains highly valued”. Therefore, “the negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary are essential.” The latest interventions in the foreign exchange market seem to have been made in April, which corresponds to the time when the franc began to weaken. The SNB clearly states that “these measures keep the attractiveness of Swiss franc investments low and thus ease pressure on the currency.”

We retain our view that the SNB policy will remain dependent on the pace of policy normalization followed by the ECB. The ECB will end its asset-purchasing program in September at the earliest and we do not expect any ECB rate hike in 2018. We believe that the SNB will want investors to have gotten accustomed to weaker levels of the franc before it considers any change in its interest rates. Therefore, we expect that the interest on sight deposits at the SNB will remain at -0.75% and the target  range for the three-month Libor rate will stay unchanged at between -1.25% and -0.25% for the whole of 2018.

The 2018 economic outlook for Switzerland is promising. Real GDP growth will rise from 0.9% in 2017 to 1.8% in 2018, before it decelerates marginally in 2019. Inflation will strengthen further: after 0.5% in 2017, it should rise to 0.6% and 0.9% in 2018 and 2019 respectively. The Swiss National Bank will be in no hurry to change its policies. We expect interest rates to remain unchanged over the whole of 2018.

Discover the impact of these economic fundamentals on Swiss financial assets here.