ZEW-CS Financial Market Test Switzerland - Economic Expectations Cool Down Somewhat, However, Forecast for Swiss Stock Market Looks Very Optimistic

According to the latest survey carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse, respondents' assessment of the economic situation continues to stand at a high level, although the perceptions diminished somewhat versus the previous month. The corresponding indicator declined in August from 93.6 to 84.7 points. The ZEW Credit Suisse indicator for expectations regarding the future economic outlook also dropped, edging down by 3 points to the -5.1 mark.

Expectations regarding inflation and interest rates revealed some noticeably significant changes. The indicator for inflation expectations plunged by 18.9 points to the 40.7 level, while the indicator for short-term interest-rate expectations plummeted by 34.3 points to the 59.3 mark. Survey respondents expect the Swiss franc to continue to gain terrain against the euro, with the relevant indicator climbing by 7.7 points. Within the scope of this month's special question, survey participants were asked to convey their forecasts for the stock-market trend. The lion's share of the respondents expressed an optimistic view here, even though they anticipate a further increase in volatility. The experts regard the danger of the effects of greater volatility spilling over to the real economy as limited.

In the latest issue of the ZEW Credit Suisse Financial Market Test Switzerland, the lion's share (84.7 percent) of the financial experts continues to assess the current overall economic situation as positive. Hence, the balance of the corresponding indicator declined by 8.9 points. None of the experts regards the prevailing economic picture as poor. Precisely 15.3 percent (up 8.9 percentage points) of the survey participants view the economic situation as normal. With regard to expectations for the future economic outlook, the percentage of respondents who anticipate no change rose to 84.5 percent. The group that expects the economic trend to brighten up within the next six months (5.2 percent), as well as the camp that believes the economy will deteriorate (10.3 percent) both decreased in number versus the previous month's survey. Overall, the balance of this ZEW Credit Suisse indicator edged down to the -5.1 mark, corresponding to a drop of 3.0 points versus July.

The near-term trend in the inflation rate paints a slightly better picture: 52.5 percent of the respondents (an increase of 12.1 percentage points) think the inflation rate will stabilize at the current level. The percentage of participants who expect a further climbing inflation rate shrunk since July, by 15.5 percentage points to the 44.1 percent level. In the August survey, some experts (3.4 percent) now anticipate a declining inflation rate.

Remarkable changes have occurred with regard to the expectations for the trend in short-term interest rates. While nearly the vast majority (93.6 percent) of financial experts in July had forecast rising short-term interest rates, only about two-thirds (62.7 percent) now still hold the same view that rates will rise. The group of experts that see constant short-term interest rates, in particular, grew larger to reach 33.9 percent. Merely 3.4 percent of the participants in this month's survey foresee an interest-rate cut. Three-fourths (75.4 percent) of the respondents expect the short-term interest-rate differential between Switzerland and the Eurozone to remain constant. A share of 7.1 percent anticipates that the differential will widen, while 17.5 percent of the analysts foresee narrowing of the spread. The balance of the relevant indicator increased by 7.0 points to the -10.4 threshold.

Expectations on the part of the experts regarding the trend in long-term interest rates also changed relatively significantly. The group that believes long-term rates will climb decreased versus the July survey, shrinking by 25.7 percentage points to the current level of 56.9 percent. In fact, the view that long-term interest rates will hold steady, similar to the opinion about short-term rates, seemed to be quite popular (39.7 percent). Once again, 3.4 percent of the experts are looking for a decline in long-term interest rates. The forecasts regarding the long-term interest-rate differential remain practically unchanged. The majority of respondents (72.9 percent) assumes that the spread will remain constant, with the relevant indicator edging up slightly to -10.1 points in August.

The financial market experts conveyed an optimistic view regarding the trend of the Swiss stock market. The analysts anticipate that the Swiss Market Index (SMI) will get back on the road to recovery in the wake of the substantial losses recorded since the beginning of June this year, predominately expecting the index to gain ground. Accordingly, the balance of the relevant indicator surged, jumping by 21.4 points to the year-to-date high point of 64.9. The spike was attributable to the fact that 77.2 percent of the respondents conveyed a positive assessment. The group that expects a constant stock-market trend decreased noticeably (by 15.6 percentage points) and now amounts to 10.5 percent. The share of experts who foresee a decline in the SMI also shrank (12.3 percent).

The number of analysts who believe that the Swiss franc will gain terrain against the euro continued to grow, rising by 6.5 percentage points versus July to reach the current 72.4 percent level. Just 5.2 percent of the participants think the Swiss currency will probably lose ground.

In addition to the noticeable changes regarding interest-rate expectations, the forecasts for the banking sector have also been dampened. While the percentage of financial market experts in July who had anticipated a worsening of the situation in the banking sector amounted to roughly one-third (35.7 percent), now more than half of the experts (53.8 percent) are in the pessimistic camp.

This month's special question addressed the assessment of the future trend on the stock markets in Switzerland, Europe, the USA and Japan. In this regard, sentiment on the part of the participants proved to be optimistic, with nearly 50 percent forecasting that the Swiss Market Index (SMI) will advance to between 9,000 and 9,500 index points by year-end. Furthermore, the responses showed that 45 percent of the experts regard the SMI as undervalued, which is considerably more than in December 2006. At the same time, more than half of the analysts expect a strong surge in stock-market volatility. 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.

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" (see link below).

Contact

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