The Swiss economy is gaining momentum
Leading indicators are running at multi-year highs, suggesting that underlying momentum is strengthening and becoming more broadly based.
Owing to weak GDP momentum in late 2016 and the first half of the year, the Swiss economy is likely to see relatively weak growth in 2017. Part of the weakness in GDP figures was due to specific factors. However, leading indicators, notably consumer confidence, manufacturing PMI and the KoF economic indicator, are running at multi-year highs, suggesting that underlying momentum is strengthening. As a result, we forecast Swiss annual GDP growth of 1.0% in 2017 (up from our previous forecast of 0.8%) and 2.0% in 2018 (up from 1.7%).
The pick-up in exports is spreading across sectors. In addition to pharmaceuticals and chemicals, the machinery, electronics, metal and watch industries are starting to grab a greater share of export growth. In 2018, Swiss exporters will continue to benefit from the healthy state of the global economy (in particular in the euro area), all the more so if the Swiss franc maintains its current level or depreciates further.
Domestic demand is expected to gain momentum as well. The growth in private consumption has been moderate so far and is expected to accelerate only slightly on the back of an improving labour market. Since the Frankenshock at the beginning of 2015, companies have reduced their investment spending on equipment and R&D. However, in view of the brighter global economic environment and the expected improvement in profits, corporate investment spending should soon gather pace. Headline inflation is likely to firm somewhat. We expect average headline inflation of 1.0% in 2018 after an estimated 0.5% in 2017.
The key question for 2018 is whether or not the Swiss National Bank (SNB) will start to hike rates ahead of the ECB. The SNB is caught between conflicting forces—a weakened Swiss franc and improved economic prospects on the one hand, but a delayed start to ECB rate hikes on the other. However, the prospect that the ECB withdraws some of its monetary stimulus in 2018 will afford the SNB an opportunity to normalise its own policy. We think that the SNB is more likely to escape from the current negative interest rate “trap” before contemplating sale of its large foreign currency holdings. Therefore, we expect a window of opportunity for a first SNB rate hike to open in Q4 2018.