ZEW–CS Financial Market Test Switzerland - Slight deterioration of the Assessment of Current Conditions, ZEW Credit Suisse Indicator Regarding the Economic Outlook also Declines Slightly to a Reading of -23.7 points

In the survey carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse (CS) in December, the assessment of the financial market experts regarding the current situation of the Swiss economy was slightly less favorable. The ZEW Credit Suisse indicator for expectations regarding the economic outlook fell to -23.7 points. 10.2 percent of the survey participants expect further improvement of economic dynamics, while 33.9 percent expect the pace of growth to decrease. A majority of survey participants expects the Swiss Franc to gain strength versus the Euro (52.5 percent), only 1.7 percent expect it to weaken further. Ahead of tomorrow's rate decision more than 86.4 percent of the survey participants expect higher short-term interest rates. Inflation expectations barely changed, the according indicator stands at 18.6 points.

In the wake of an extraordinarily good run in 2006, analysts are heading into the new year with a confident stance. The indicator for the current economic situation recorded a slight dip of -1.9 points in December versus the November reading, but at 91.5 points still underscores the prevailing optimistic sentiment in Switzerland. The future outlook was also only slightly changed. With a reading of -23.7 points (down 2.4 points versus the previous month), the corresponding economic expectations indicator signals an impending economic cooldown. While 10.2 percent of the survey participants say they anticipate further improvement in economic momentum, 33.9 percent expect the situation to worsen. The rest - more than half of the respondents - believe the most probable scenario is that the very favourable economic environment will persist for the next six months. Expectations for slightly weaker growth are presumably primarily attributable to the dampened assessment of the growth outlook in the US and the expected decelerating growth in the euro zone. On the other hand, the climate for consumer spending remains favourable. Consumption should reap rewards from the positive trends in employment and wages and, as a result, continue to help drive the Swiss economy along a robust and more broadly based growth path in 2007.

The inflation rate remained tame in 2006 despite vigorous economic growth. Roughly two-thirds of respondents expect no change in the current low inflation rates for the first half of 2007, while one-fourth regard higher consumer prices as the more likely scenario. Notwithstanding the lower inflation rates, the Swiss National Bank (SNB) should continue to pursue its policy of slowly normalising key interest rates. Consequently, 86.4 percent of survey participants should not be surprised by another 25-basis-point interest-rate hike at the upcoming quarterly monetary assessment. On the other hand, merely 54.2 percent of the experts expect an increase in long-term interest rates.

The trend in the Swiss franc/euro exchange rate showed a steady pattern of depreciation in the course of 2006. In mid-November, the Swiss franc hit a new low point versus the euro. This development occurred against the backdrop of swifter action on the part of the European Central Bank (ECB), as well as the continuing attractiveness of the Swiss franc as a financing currency for carry trades. The assessment of survey participants regarding the expected trend in the Swiss franc/euro exchange rate showed an increase in the number of voices who regard appreciation of the franc as likely.

On the heels of hitting a high point of roughly USD 78/barrel at the beginning of August and a year-to-date low of about USD 55/barrel at the outset of November, crude-oil prices resurged somewhat more strongly above the USD 60/barrel threshold in recent weeks. The increase in oil prices is attributable to fears surrounding further cutbacks in production by the Organization of Petroleum Exporting Countries (OPEC). Despite the expected cooldown in global economic growth, oil prices should remain at high levels in 2007 as well, according analysts' forecasts.

This month's special question dealt with the assessment of equity market developments in 2007 and accordingly the preferred sector allocation in this environment.

The Survey Process and Methodology

The ZEW has conducted a similar monthly survey for Germany since 1991. The aim of the Swiss survey is to develop indicators both for Switzerland's general economic climate as well as for the Swiss services sector.

Specifically, survey participants are asked to give their medium-term expectations for important international financial markets as regards the development of the economy, the inflation rate, short- and longer-term interest rates, equity prices and exchange rates. In addition, the financial experts are also asked to assess the earnings situation of companies in the following Swiss services sectors: banks, insurance, consumer/retail, telecoms, and services as a whole.

The results represent the net difference between the percentage of positive and negative responses. Figures in parentheses show the changes for each indicator compared to the previous month.

Contact

Gunnar Lang (ZEW), Phone: +49/621/1235-372, E-mail: lang@zew.de  

Thomas Herrmann (CS), Phone: +41/44/333-5062, E-mail: thomas.herrmann@credit-suisse.com