ZEW–CS Financial Market Test Switzerland - ZEW Credit Suisse Indicator Regarding the Economic Outlook at -10.8 Points Paints a More Optimistic Picture than in the Previous Month

In the survey carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse, the surveyed financial market experts continued to paint a very positive picture regarding the current situation of the Swiss economy. The ZEW Credit Suisse indicator for expectations regarding the economic outlook rose to -10.8 points. 12.3 percent of the survey participants expect further improvement of economic dynamics, while 23.1 percent expect the pace of growth to decrease. 47.7 percent of the survey participants - again less than in the previous month - expect the Swiss Franc to gain strength versus the Euro, while 10.8 percent expect further weakness in this regard. Following the renewed tightening of monetary policy by the SNB in December, 86.2 percent of the survey participants expect further tightening to come. Inflation expectations barely changed, the according indicator stands at 18.6 points.

The results of the survey on the current economic situation confirmed the persistently positive assessment of the economic picture in Switzerland, with the corresponding indicator even improving slightly this month by 0.8 points to the 92.3 mark.

At -10.8 points, the economic expectations indicator signaled a cooldown in the economy, similar to the previous month's reading. However, the assessment brightened up noticeably compared with the December survey, with an increase of 12.9 points. While 12.3 percent of the experts anticipate an improvement in economic momentum, 23.1 percent of the respondents expect a turn for the worse. Nevertheless, the majority of survey participants - i.e., 64.6 percent, up 8.7 percent month-on-month - forecast that the overall economic situation will continue to follow a positive trend during the next six months.

The Swiss National Bank (SNB) raised its target range for three-month LIBOR by a further 25 basis points on 14 December 2006. The SNB also reaffirmed its determination to continue to pursue a gradual alignment of interest rates, although its inflation estimate over the entire forecast horizon (up to and incl. June 2009) calls for a rate that lies below the 2 percent mark commensurate with price stability, according to its definition.

As in the previous month, the vast majority of survey participants (59.4 percent) presume that the inflation rate will hold steady at the low level recorded in recent months. In December, for example, the inflation rate amounted to merely 0.6 percent. The inflation indicator points to a rising rate, with a reading of 18.8 points. In this regard, one influencing factor could have been the anticipated surge in crude-oil prices. In the wake of the considerable retreat in oil prices, the lion's share of financial market experts (54.6 percent) expect oil prices to advance again, with the corresponding indicator rising by a further 10.0 points to the 35.8 mark.

The indicator for short-term interest rates - with a reading of 84.7 points, up 1.7 month-on-month - distinctly showed that the majority of analysts expect the SNB to continue to hike interest rates. On the other hand, 12.3 percent of the respondents assume that the central bankers will hold interest rates steady.

Nevertheless, the indicator for long-term interest rates increased by 9.0 points compared with the previous month, to a reading of 54.7. Precisely 59.4 percent of survey participants foresee a rise in long-term rates (up 5.2 percent month-on-month), while 35.9 percent expect rates to remain at the same level. Only 4.7 percent forecast lower long-term interest rates. Most respondents (66.1 and 71.9 percent, respectively) believe that the interest-rate differential between the euro zone and Switzerland will hold steady at the short end as well as long end of the curve.

As in the previous month, the majority of analysts (47.7 percent) expect the Swiss franc to gain terrain against the euro in the medium term, on the heels of the trend toward depreciation seen last year. A substantial higher proportion of respondents this month compared with last anticipate that the franc will continue to lose ground versus the euro - although the percentage is still in the minority at 10.8 percent. The corresponding indicator declined by 13.9 points to a level of 36.9.

Following a successful year-end 2006 rally and remarkable kick off to the new year, the Swiss Market Index (SMI) broke through the 9,000 threshold in the second week of January. The analysts surveyed also said they expected the SMI to continue on a favourable course, with 49.9 percent predicting that the index will advance, while 18.8 percent anticipate a decline. The corresponding indicator rose to 31.1 points (up 4.8 points month-on-month).

This month's special question dealt with the assessment of the US housing market developments in 2007 and consequences for US private consumption or potential effects for the Swiss economy. Details can be found in this month's edition of the Financial Market Report Switzerland (see below).

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.

The detailed results can be obtained from the "Switzerland Financial Market Report", which is published on a monthly basis (see below).

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