ZEW–CS Financial Market Test Switzerland - Economic Expectations for Switzerland Have Diminished Noticeably

The Financial Market Test Switzerland, carried out by the Centre for European Economic Research (ZEW) in cooperation with the Credit Suisse, revealed that economic expectations diminished considerably in February. Hence, the relevant ZEW CS indicator declined by 22.8 points to the -55.6 mark. The assessment of the current economic situation deteriorated as well in February, although it still stands at a high level of 72.2 (down 13.3 points compared with the previous month).

Inflation expectations for the coming six months decreased noticeably, too, with the balance of indicators declining from 54.5 to 26.4 points. At the same time, nearly half of the financial market experts forecast lower oil prices on a six-month horizon. The majority of survey participants (61.1 percent) still expects short-term interest rates to remain unchanged in the next half-year. However, since more of the experts surveyed in February anticipate lower interest rates and fewer analysts presume interest rates will climb, the corresponding balance of indicators dropped by 49.5 points to the -20.4 level.

The assessment of economic expectations in Switzerland on a six-month horizon diminished considerably in February. Accordingly, none of the financial market experts surveyed regards a brightening of the economic picture in the coming half-year as a likely scenario. The share of respondents who expect the present economic situation to worsen in the next six months rose by 19.2 percentage points to 55.6 percent. Hence, the relevant ZEW CS indicator declined to the -55.6 mark (versus -32.7 the previous month).

However, the positive perception of the current economic environment in Switzerland prevails in February. A majority of 72.2 percent of the experts still rates the country's present state of the economy as good. Nevertheless, the share of analysts who regard the current economic situation as normal increased to 13.2 percent. Not a single financial market expert viewed today's economic climate as bad. The balance of indicators for the current economic situation thus dropped from 85.5 points in January to the 72.2 mark in February.

Energy prices have declined somewhat, on the heels of spiking to record-high levels in January. Accordingly, the influence of oil prices as an inflation driver is likely to weaken. Merely 39.6 percent of survey participants still expect the inflation rate to climb in the coming six months, compared with 60.0 percent in the previous month. The relevant balance of indicators for inflation expectations thus declined by 28.1 points to the 26.4 level.

International stock markets have continued to follow their downward trend in the past month, and the Swiss Market Index (SMI) suffered severe setbacks. However, 46.2 percent of respondents still expect the SMI to rebound on a six-month horizon, a decrease of around 2 percentage points versus the January survey. Nevertheless, 25.0 percent of the analysts presume that the situation on the stock markets will continue to deteriorate, and as a result, the SMI will lose further ground. The relevant balance amounted to 21.2 in February, corresponding to a decrease of 6.6 points.

Survey participants anticipate the Swiss franc to continue to gain terrain against the euro and US dollar. The expectations are, however, less pronounced than in January, and the balance of indicators for US dollar expectations, in particular, plunged by 27.1 points in the February survey. The Swiss franc exchange rate changed just very slightly against the Japanese yen and British pound in recent weeks. But the financial market experts still expect to see a stronger trend in the Swiss franc versus these two currencies as well in the coming six months.

The trend in commodity prices paints a mixed picture. Oil prices have declined in recent weeks, primarily due to the risky economic prospects. Expectations on the part of the survey participants for Brent crude-oil prices increased somewhat again in February versus the previous month, however. A share of 48.1 percent of the respondents expect crude-oil prices to retreat, while 13.5 percent are looking for rising prices. The relevant balance of indicators for oil price expectations reached the -34.6 mark, corresponding to a rise of 3.1 points compared with the previous month.

Regarding gold, 44.0 percent of the experts still believe that the price of the precious metal will continue to advance. On the other hand, roughly 30 percent of the respondents forecast that gold prices will fall in the next half-year. The corresponding balance of indicators for gold price expectations thus edged down by 2.3 points versus the previous month to reach a level of 14.0 points.

In the eyes of most survey participants, the corporate earnings situation will continue to follow a negative trend, with 54.0 percent of the analysts forecasting a drop in profits (up 14.4 percentage points versus the previous month). Far fewer experts (44.0 percent) anticipate no change in the earnings situation compared with the January survey. The relevant balance thus decreased by 16.2 points to the -52.0 level. Respondents forecast constant (38.0 percent) or falling (62.0 percent) profit margins. Hence, the corresponding balance recorded a value of -62.0 (down 15.8 points versus last month). Even though the majority of experts (61.5 percent) still expects the Swiss unemployment rate to hold steady, concerns are mounting that companies could reduce their headcounts in the future. The relevant balance of indicators for the unemployment rate climbed by 23.4 points to the 30.8 level.

Within the scope of this month's special question, we asked the financial market experts to convey their assessment of the effects of the subprime crisis on the Swiss banking system and economic trend. Almost one-third of the survey participants regards the impact on the banking sector as serious, while 11.0 percent foresee rather modest risks. Overall, 53.0 percent of the respondents believe that the effects of the crisis on Switzerland’s real economy will turn out to be moderate. Details can be found in this month's edition of the Financial Market Report Switzerland (see link 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.

Contact

Dr. 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