In a report published by SECO, a group of economy experts working for Switzerland’s federal government, says it anticipates an acceleration in economic growth in Switzerland from 0.8% in 2015 to 1.5% in 2016 and 1.9% in 2017. Along side this they expect unemployment to rise from 3.3% in 2015, to an annual average of 3.6% in 2016, before falling again to 3.4% in 2017. However, they also see risks.
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The group mainly pins the slowdown in 2015 on the appreciation of the Swiss franc, which exerted drag on exports in the first three quarters.
Although the balance of trade in goods delivered a positive contribution to growth in the 3rd quarter, the contribution from the balance of trade in services was negative. Furthermore, key components of the domestic economy lost momentum over recent quarters. This applies in particular to the construction industry, which reported the first decrease after several years of strong growth. Domestic household and government consumption, in particular, provided a positive boost in the 3rd quarter.
Survey based sentiment indicators, such as the one conducted by the KOF, still show no clear signs of an economic turnaround. The surveys indicate a certain degree of stabilisation since the summer, including in the hardest-hit industries: trade and tourism.
Domestic demand should remain an important pillar of the economy over the entire forecasting horizon. Given persistent negative inflation, domestic households can expect real increases in purchasing power in 2016, which should at least partially flow into consumer spending. Foreign trade is not expected to provide any significant impetus for the current year. For the next two years, the Expert Group anticipates positive contributions to growth from foreign trade in goods and services.
There are signs of a continued weakness of investments in construction in 2016 but no crisis. In addition to the low interest rate environment, sustained population growth should support investments in construction and domestic household consumption.
The negative trend in prices in many sectors is likely to continue for a few quarters until the effects of the appreciation in the value of the Swiss franc and lower oil prices vanish. The group expects to see consumer price inflation remain slightly negative in 2016 (-0.1%) and not return to positive territory until 2017 (+0.2%).
Economic risks
The normalisation of U.S. monetary policy still represents a risk for the economic prospects of various emerging markets, with potential spill over to the global economy. In view of their fragile condition, key emerging economies might be affected by considerable turmoil and capital outflows as soon as interest rates in the USA begin to increase. Such an evolution could affect economic growth in various developed countries and indirectly in Switzerland as well.
The Bank of International Settlements recently released its early warning indicators for stress in domestic banking systems. In China, the credit to GDP gap, a measure of the gap between actual credit to GDP and the ratio over the long run, rose to 30.1% in the first quarter of 2016, three times the level signaling elevated stress. The figures can be found on page 22 of this BIS report.
The uncertainty regarding the future rules on immigration also poses significant risks for the Swiss economy. Restrictive implementation of the Mass immigration Initiative, which sharply reduces migration could have a detrimental effect on domestic demand as well as on corporate decisions on investment and business location.
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