ZEW–CS Financial Market Test Switzerland - Economic Expectations Brighten Up Again

According to the survey results of the Financial Market Test Switzerland, carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse, economic prospects have brightened up slightly again in May. The relevant ZEW-CS-indicator for economic expectations increased by a noticeable 11 points, reaching the -60.4 mark. On the other hand, the experts’ assessment of the current economic picture remained nearly unchanged at the 64.6 level (down 0.7 points). Interest rate expectations rose considerably versus the previous month’s survey, although the clear majority of respondents continue to expect rates to hold steady in the coming six months. The corresponding balance of indicators jumped by 14.4 points to the 5.3 threshold. At the same time, inflation expectations increased in May too, with 54.2 percent of survey participants predicting that prices will continue to rise. This month’s "special question" addressed the prevailing issue of the trend in food prices, revealing that a slight majority of respondents expect prices to climb further in the medium term.

The results of this month’s survey conducted in conjunction with the Financial Market Test Switzerland show a more positive picture of economic momentum on a six-month horizon, although respondents continue to expect the economy to weaken. Nearly 65 percent of the participants in the May survey still predict that the economy will deteriorate, but this group shrank by 10.9 percentage points versus the previous month. Almost one-third of the experts now expect to see no change in the economy in the medium term. The corresponding balance of indicators thus increased by 11 points to the -60.4 mark.

The analysts’ assessments regarding the current economic situation remained unchanged at a high level for the most part, however. Roughly two-thirds of the experts judge the prevailing economic environment in Switzerland as “good,” while the rest of the survey participants regard the climate as "normal.” Hence, the relevant balance declined by 0.7 points to the 64.6 level.

Switzerland has been experiencing a steadily climbing inflation rate already since September 2007. This month’s survey results reveal that noticeably more financial market experts (54.2 percent, up 17.5 percentage points) anticipate that inflation will continue to rise. On the other hand, a considerably smaller share of respondents (29.2 percent) foresees no change on the inflation front. The indicator for inflation expectations therefore surged strongly by 25.3 points to the 37.5 threshold.

Expectations on the part of the analysts regarding short-term interest rates also differed markedly compared with the previous month’s survey: A much larger proportion of participants 22.9 percent (up 12.7 percentage points) expect short-term rates to rise. The Swiss National Bank (SNB) has held its target range for the three-month-LIBOR steady since September at a level of 2.25 percent–3.25 percent. The majority of financial market experts (62.5 percent) sees no increase in short-term interest rates in the medium term. The corresponding balance was up 14.4 points at 8.3.

A large share of respondents (43.8 percent) continues to anticipate an increase in long-term interest rates, while half of the experts believe long-term rates will remain unchanged.

Upbeat expectations have prevailed with regard to share prices, with the vast majority of experts (58.7 percent) forecasting an advancing Swiss Market Index (SMI). A share of 23.9 percent of survey participants foresees no changes in the SMI. The relevant balance rose by 8 points to the 41.3 mark.

Regarding exchange rates, just 14.6 percent of the analysts think that the new downtrend in the Swiss franc versus the euro that commenced in mid-March will continue. But a noticeably greater percentage of the financial market specialists (41.7 percent, up 5.5 percentage points) expect the Swiss currency to gain terrain on a six-month horizon. Nevertheless, slightly more (43.8 percent) survey participants forecast no change in the franc against the euro.

In the wake of the recent sharp spike in oil prices to record highs, nearly one-fourth of the respondents predict that the price of oil will continue to climb, while an equal number of analysts see no change. However, more than half (52.2 percent) of the experts are looking for a decrease in oil prices. The corresponding balance nonetheless increased considerably by 15.2 points to the -28.3 level.

The experts conveyed much more disparate opinions regarding the gold price: 38.6 percent of survey participants think the price of the precious metal will rise further, while just slightly fewer (34.1 percent) anticipate a decline.

The assessment of the corporate earnings situation turned out to be much more positive in the current survey as well: 58.7 percent (down 10.9 percentage points) of the respondents now believe that the earnings picture will deteriorate.

On the other hand, 73.9 percent of the analysts regard shrinking profit margins as the most likely scenario, while merely 2.2 percent of the specialists expect an increase here.

With respect to the unemployment rate in Switzerland, the lion’s share (58.3 percent) of the financial market experts forecasts no change. But 39.8 percent anticipate an increase in the jobless rate. The relevant balance therefore rose by 9.8 points to reach the 37.5 mark.

Within the scope of the May “special question,” the financial market experts were asked to convey their assessment of the trend in food prices. Roughly 50 percent of the respondents forecast an increase in prices of wheat and corn on a five-year horizon, while on the other hand, the lion’s share of experts viewed the price of coffee as remaining stable. Details can be found in this month's edition of the Financial Market Report Switzerland.

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