ZEW–CS Financial Market Test Switzerland - Economic Outlook for Switzerland Deteriorates

The Financial Market Test Switzerland, carried out by the Centre for European Economic Research (ZEW) in co-operation with Credit Suisse, revealed in March that economic prospects continue to deteriorate. The relevant ZEW-CS-indicator for economic expectations declined by 16.2 points to the -71.7 mark. The assessment of the current economic situation edged down by 2.7 points to the 69.6 level in March. At the same time, inflation expectations diminished again, with only around 30 percent (down 9 percentage points versus the previous month) of survey participants still anticipating that inflation rates will continue to climb. Interest rate expectations have also decreased somewhat compared to the February survey results. The lion’s share of the respondents (78.3 percent) expects no change in short-term interest rates on a six-month horizon. Responses to this month’s "special question", however, showed that nearly half of the experts regard an interest rate level of less than 2.75 percent by year-end as a likely scenario.

The results of this month's Financial Market Test Switzerland survey continue to paint a worsening picture of economic momentum on a six-month horizon. The lion's share (71.7 percent) of the financial market experts surveyed expects the economic climate in Switzerland to deteriorate. Merely 28.3 percent of the respondents forecast no change in the Swiss economy. And once again, none of the analysts predicts an improvement in the situation in the coming six months. On the other hand, the balance of indicators for the assessment of the current economic environment edged down just slightly, by 2.7 points to the 69.6 mark. More than two-thirds (69.6 percent) of the respondents assess the prevailing economic dynamic as "good".

The inflation rate has climbed to a high plateau in recent months and is currently hovering at the 2.4 percent (YoY) level. But 54.3 percent of the survey participants regard an unchanged high inflation rate as the most likely scenario, while 30.4 percent of the analysts anticipate that inflation will continue its ascent. Only 15.2 percent of the experts foresee declining inflation rates. Compared with the February survey, however, inflation expectations diminished somewhat, and the corresponding balance dropped as a result by 11.2 points to the 15.2 mark.

The balance of indicators for short-term interest rates increased noticeably by 16 points to reach the -4.3 level. The current survey results reveal that just 13.0 percent of the financial market experts believe that short-term rates will decline (versus 29.6 percent in the previous month), while 78.3 percent of the respondents see no change in three-month LIBOR in the medium term. After the European Central Bank (ECB) held its benchmark interest rate steady again at its last monetary policy meeting, a smaller proportion of the analysts (31.8 percent, down 8.6 percentage points) expect the short-term interest rate differential between Switzerland and the Eurozone to narrow. More than half (56.8 percent) of the respondents foresee no change in the interest rate spread.

The assessment of long-term interest rates is following a pattern similar to short-term rates, with only 10.9 percent (down 7.6 percentage points) of the participants looking for lower long-term rates. While 45.6 percent of the financial market experts forecast no change in long-term interest rates, 43.5 percent expect an increase.

Expectations regarding the Swiss stock market reveal just a slight dip in the balance of indicators, from 21.2 to 18.2. The majority of the analysts surveyed (45.5 percent) continue to predict that share prices will advance.

Although a large share (45.7 percent) of the respondents - albeit a noticeably smaller proportion (down 11.8 percentage points month-on-month) -still thinks that the Swiss franc will gain further terrain versus the euro, 47.8 percent of the analysts see no change in the exchange rate.

The price of a barrel of oil has spiked considerably above the USD 100 threshold lately. More than half of the survey participants (56.8 percent) anticipate that oil prices will decline in the medium term. One-fourth of the respondents believe that high oil prices will prevail. Consequently, the relevant balance decreased by 4.0 points to the 38.6 mark.

In light of the volatile financial markets and the search for safe-haven investments, gold prices have jumped sharply in recent months as well. Most of the respondents (47.6 percent) expect the price of the precious metal to continue to rise. Nevertheless, the share of experts who think that gold prices will retreat in the coming six months also increased (to 40.5 percent).

The corporate earning situation should deteriorate in the next half-year, according to the majority (58.1 percent) of the analysts surveyed. But a significant number (41.9 percent) of experts also expect no change in the earnings outlook. In contrast, the assessment of companies' profit margins looks noticeably worse, with more than two-thirds (73.8 percent) of the financial market experts anticipating that profit margins will shrink, while just 26.2 percent (down 11.8 percentage points) see no change here.

Nearly one-third (31.1 percent) of the respondents have a more pessimistic view of the Swiss labor market situation on a six-month horizon. But the majority (64.4 percent) of experts regard an unchanged unemployment rate as the most probable scenario.

Within the scope of the March "special question", the financial market experts have been asked to convey their assessment of the economic trend in Switzerland regarding the next two years: 59.0 percent of the respondents forecast Swiss GDP growth of at least 2.0 percent for 2008, while 44.0 percent expect the economy to grow at the same rate in 2009. The same percentage (29.0 percent) of financial market experts anticipate a moderate growth rate of between 1.7 percent and 1.9 percent for this year and next. 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, 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