ZEW–CS Financial Market Test Switzerland - Economic Expectations and Stock-Market Outlook Diminish Drastically, but Assessment of Current Situation Remains Positive

According to the latest survey carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse, the assessment of the current economic situation in Switzerland remains at a high level, although the balance of the relevant indicator edged down by 4.1 points to the 80.6 mark. Economic expectations decreased much more noticeably, dropping by 21.6 points to the -26.7 level. The assessment of the outlook for the Swiss stock market diminished drastically as well, with the balance of the corresponding indicator plunging by 29.1 points below the previous month’s reading to hit 35.8.

In contrast, expectations regarding inflation and long-term interest rates changed very little. In terms of short-term interest rates, considerably fewer participants, compared with the last survey, anticipate an increase in the coming months. Roughly half of the respondents regard the subprime mortgage crisis as posing a very significant danger for the global financial system. In contrast, the overwhelming majority of experts expects the impact of the crisis on the Swiss economy to turn out to be merely modest. A thin majority of the participants expects the liquidity crunch to fade away in the next three months.

The September survey of the ZEW Credit Suisse Financial Market Test Switzerland continues to paint a positive picture of current economic momentum. The lion's share of the analysts (82.4 percent) regards the economic situation in Switzerland as good. However, the corresponding balance of indicators declined once again by 4.1 points to the 80.6 mark.

The financial market experts surveyed conveyed a pessimistic view regarding their economic expectations. Roughly one-third of the respondents - up 23.6 percentage points month-on-month - expect the overall economic situation in Switzerland to worsen. It is questionable whether fears have emerged that the subprime mortgage crisis in the USA will spread to Switzerland and cool down the country's economy. The ZEW CS-indicator for economic expectations in Switzerland plunged noticeably by 21.6 points to the -26.7 mark.

However, the balance still exceeds the levels registered in the other economic regions surveyed, especially the United States and Great Britain.

Around 46.5 percent of the analysts anticipate that short-term interest rates will continue to climb (down 16.2 percentage points month-on-month). In contrast, nearly 9 percent of the experts forecast an interest-rate cut. The balance of the relevant indicator decreases by 21.7 points to the 37.6 level.

The prevailing turbulence swirling on the global financial markets also plays a significant role for the interest-rate differential between Switzerland and the eurozone. The majority of analysts (57.1 percent) foresees no change in the differential in short-term interest rates, while 35.7 percent of the respondents even predict that the spread will narrow.

In contrast to the very upbeat expectations regarding the Swiss Market Index (SMI) conveyed last month - when 77.2 percent of the experts had forecast that the SMI would gain ground - the current survey reveals that considerably fewer analysts (57.2 percent) expect to see advancing share prices. In contrast, 21.4 percent of the respondents believe that the SMI will lose territory on a six-month horizon. Consequently, the balance of the corresponding indicator drops by 29.1 points to the 35.8 threshold.

In the wake of a brief phase of Swiss-franc appreciation in July and August, the currency has shown a renewed trend toward depreciation since mid-August. A majority of 61.4 percent of the financial market experts (down 11 percentage points versus the previous month) expect the Swiss franc to gain terrain, while 7 percent of the participants think the currency will lose further ground. The balance of the relevant indicator declines by 12.8 points to the 54.4 mark.

With regard to the price of a barrel of oil, nearly an unchanged share of the respondents (29.1 percent) forecast sinking oil prices. Oil prices have spiked to new record highs in recent months and are currently hovering at roughly USD 77/barrel. Nevertheless, 43.6 percent of the experts (up 7.4 percentage points month-on-month) expect oil prices to climb further.

Regarding expectations for the sectors, the indicator for the banking sector, in particular, deteriorated as well as the indicators for the consumer and retail sectors. Merely 1.9 percent of the respondents expect the earnings situation for banks to improve, while an overriding majority of 73.1 percent (up 19.3 percentage points) of the experts foresees worsening of the earnings picture. Hence, the balance of the corresponding indicator drops by 27.1 points to the -71.2 level.

This month's special question addresses the assessment of the liquidity crisis and its consequences. Roughly half of the survey participants foresees very significant risks for the worldwide financial system, while the other half of the respondents regards the risks as low. In contrast, the overriding majority of experts assesses the effects on the Swiss economy as minimal to modest. Moreover, 61 percent of the analysts anticipate that the liquidity crisis will not have negative effects on Swiss interest rates. A thin majority of the participants expects the liquidity crunch to fade away in the next three months.

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 - including survey participants' assessment of developments in other countries - can be found in this month's edition of the "Switzerland Financial market report".

Contact

Dr. Michael Schröder (ZEW), Phone: +49/621/1235-140, E-mail: schroeder@zew.de

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

Fabian Heller (Credit Suisse), Phone +41/44/3329061, E-mail: fabian.heller@credit-suisse.com