ZEW-CS Financial Market Test Switzerland - Pessimistic economic expectations prevail

The latest Financial Market Survey Switzerland, carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse, reveals that expectations regarding the Swiss economy diminished again in August. The ZEW-CS indicator of economic expectations edged down by 2.7 points to the -79.6 mark. The financial experts also viewed the current economic environment in a worse light in this month’s survey, with the relevant balance of indicators declining to the 26.5 level (down 14.5 points). Inflation expectations as well as expectations for short-term interest rates were noticeably dampened. Roughly 45.0 percent of survey participants anticipate that inflation rates will retreat on a six-month horizon. The share of financial market specialists who predict that short-term interest rates will increase also shrank considerably in August. Instead, the overriding majority of analysts believe that rates will hold steady. This month’s “special question” revealed that most respondents do not expect the forthcoming round of wage negotiations in Switzerland to pose any danger for price stability.

The results of the August survey reveal that the downward trend in medium-term economic expectations continues to prevail for the third consecutive month. 81.6 percent of the financial market experts forecast a deterioration of the Swiss economy on a six-month horizon. Merely 2.0 percent of survey participants foresee any forthcoming brightening up of the picture regarding economic momentum. Based on these results, the indicator for economic expectations edged down by 2.7 points month-on-month to the -79.6 mark. The analysts’ assessment of the present state of the economy turned out to be less upbeat compared with the previous month. Nearly three-fourths of the specialists surveyed assess the economic environment as "normal", while just 26.5 percent regard the climate as "good". Consequently, the relevant indicator for the current economic situation declined by 14.5 points to the 26.5 level.

The inflation rate in Switzerland climbed up to the 3.1 percent (YoY) plateau in July, although consumer prices dipped by 0.4 percent versus the previous month. The Swiss financial market experts expressed a more positive view of the trend in prices in the coming six months than in the previous survey. While only 16.3 percent of respondents still expect inflation to rise, 44.9 percent now anticipate declining inflation rates. As a result, the balance of indicators for the inflation rate dropped sharply by 31.2 points to the -28.6 threshold.

This assessment is manifested in the expectations for short-term interest rates. Far more than three-fourths of the participants (81.6 percent) predict that interest rates will hold steady in the short-term maturities segment in a six-month timeframe. Just 8.2 percent of the analysts expect short-term rates to rise. Hence, the corresponding balance decreased noticeably by 23.1 points to reach the -2.0 mark. Regarding the differential in short-term interest rates between Switzerland and the Eurozone, a clear tendency in opinion is apparent: 73.5 percent of the respondents see no change in the spread in the following six months, while only 6.1 percent still believe that the interest rate differential will widen.

The view regarding long-term interest rates is not so clear-cut, with 40.8 percent of the financial experts looking for constant rates versus 36.7 percent who believe long-term interest rates will increase. At the same time, 77.6 percent of the analysts forecast that the differential between Swiss and Eurozone interest rates in the long-term maturities segment will remain unchanged, and 10.2 percent think that narrowing of the spread is a probable scenario.

The Swiss Market Index (SMI) reached a new record three-year low in mid-July in the wake of a more prolonged period of retreating stock prices. Amid the interim peak in oil prices in July and the subsequent descent in prices, the stock market succeeded in staging a recovery, which should also continue into the next half-year according to the opinion of 65.2 percent of the August survey participants. However, 21.7 percent of the analysts hold the opposite view. The relevant balance was down just slightly at a high level of 43.5 points. After more than 60 percent of the experts in the previous month’s survey had predicted that oil prices would fall, 46.7 percent of the respondents still see further sinking oil prices, while 35.6 percent expect stable prices in the coming six months. Expectations regarding gold prices painted a similar picture, with nearly half of the financial market experts (46.7 percent) anticipating that the price of the precious metal will decrease. Turning to the Swiss Franc (CHF) exchange rate versus the euro, the opinions on the part of the participants in the Financial Market Test Switzerland were mixed: 61.5 percent of the analysts in last month’s survey had forecast that the CHF/EURO currency pair would continue to remain stable, compared with just 51.0 percent in August, while 40.8 percent now believe the Swiss Franc will gain terrain against the euro.

Roughly 80 percent of the analysts foresee a deterioration in corporate earnings as well as profit margins on a six-month horizon. Merely 4.3 percent see a positive trend in the earnings situation and 2.2 percent an improvement in profit margins. While expectations regarding the earnings picture turned out to be more negative versus the previous month, forecasts for profit margins were slightly more positive than in the July survey results. The financial market experts conveyed a slightly more optimistic view regarding the state of the Swiss labour market in the August survey. Precisely 69.6 percent of the specialists still expect the unemployment rate to increase, compared with a proportion of 73.7 percent in the previous month. Another 28.3 percent of the analysts hold the opinion that the jobless rate will remain steady in the coming six months. The resulting relevant balance of indicators for the unemployment rate amounted to 67.4 points.

Within the scope of this month’s "special question", the financial market experts were asked to convey their assessment of the danger of a wage/price spiral resulting from the forthcoming round of wage negotiations. The majority of the analysts anticipates that wage increases will turn out to be moderate at just 1.5 percent to 3.0 percent, which would not pose any significant threat to consumer price inflation in the medium term.

The survey process and methodology

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.

For further information please contact

Dr. Gunnar Lang, Phone: +49/621/1235-372 E-mail: lang@zew.de

Fabian Heller (Credit Suisse), Phone: +41/44/33209061, E-mail: fabian.heller@credit-suisse.com