ZEW-CS Financial Market Test Switzerland - Assessment of Current Condition Rises to Highest Level Since the Launch of the Survey, Indicator for Expectations Regarding Economic Outlook Falls to -14.1 Points

In the survey carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse in October 2006, the assessment of the financial market experts regarding the current situation of the Swiss economy improved and even reached the highest level since the survey was launched. Contrary to this the indicator for expectations regarding the economic outlook fell to -14.1 points. A deterioration of economic momentum is expected by 24.6 percent (+7.4 percent) of survey participants, while only 10.5 percent (-8.5 percent) expect an improvement. Fewer survey participants expect inflationary pressure to rise, a majority expects further tightening by the Swiss National Bank. Only 7 percent expect a further depreciation of the Swiss Franc vs. the Euro.

The survey participants continue to give a very favourable assessment of the current economic situation in Switzerland. The corresponding indicator now stands at 94.7 points, representing the highest value since the beginning of the survey and an increase of 10.2 points relative to the prior month. While the assessment of the current economic situation could hardly be better, sentiment regarding the outlook for the Swiss economy is relatively restrained. For the first time since the survey began, the relevant indicator has definitively entered negative territory with a value of -14.1 points. This represents the third successive decline for this indicator. Only 10.5 percent of the participants expect economic momentum to improve further, whereas 64.9 percent anticipate no change and 24.6 percent expect the situation to worsen. However, this indicator is less disconcerting than it may appear at first glance, given that the extent of the current economic upturn leaves little room for further improvement; indeed, in the current environment, an unchanged economic situation represents an extremely optimistic assessment.

As the indicators for the other surveyed countries reveal, participants anticipate an economic slowdown in the major economies (particularly in the USA). This downturn will not be without impact on Switzerland, despite the fact the country's dependency on global economic performance is currently reduced by more robust private consumption figures.

There was also a renewed decline in inflationary expectations. The relevant indicator fell by 22.2 points relative to the September survey and now stands at 10.6 points. It is interesting to note in this context that this anticipated decline in the upward trend of prices comes at the same time as expectations of a renewed rise in the price of oil (see below).

In the latest survey, there was a decline in the percentage of participants anticipating a further interest-rate increase by the Swiss National Bank. Nevertheless, approximately three-quarters of those surveyed believe that the central bank will likely continue with its policy of gradual interest-rate adjustments. By contrast, the results of the survey indicate that an increase in long-term interest rates is less likely. The relevant indicator has continued its ongoing downtrend since the start of the survey and now stands at 42.0 points for October.

In recent weeks, the Swiss Market Index (SMI) climbed to new highs with valuations in excess of 8,600 points. Above-average economic growth in the current year, coupled with the ongoing low level of interest rates, have been contributing factors in the SMI's performance of almost 12 percent since the beginning of the year. New highs or, at the very least, substantial share-price gains were also recorded by the other European indices, as well as by the Dow Jones. Nevertheless, the experts do not believe that the equity market is overpriced, given that almost half of them (47.3 percent) anticipate further share-price gains on the Swiss stock market, while only 18.2 percent expect share prices to fall. Based on this assessment, the positive performance will likely be sustained in the months ahead.

The Swiss franc has lost significant terrain relative to the euro in recent months. The survey results regarding the anticipated exchange-rate performance of the Swiss franc relative to the euro reveal that 49.1 percent of participants are now expecting the Swiss franc to gain ground, while only 7.0 percent anticipate a further depreciation. The relevant indicator now stands at 42.1 points, representing an increase of 12.7 points relative to the prior month.

Oil prices have declined by almost 25 percent since the highs recorded at the beginning of August. However, OPEC's planned cut in production volumes already appears to be impacting the expectations of the survey respondents, according to which the downturn in oil prices will not persist for very much longer.

This month's special question dealt with real estate portfolio investments. According to the survey participants real estate investments should have a larger share in portfolios of institutional investors than in private portfolios. Private investors should invest a larger share of these real estate investments indirectly. Geographically the highest returns are expected in Eastern Europe. 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.

Contact

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

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