ZEW–CS Financial Market Test Switzerland - The Credit Suisse ZEW Indicator of Economic Expectations Falls in January

The Financial Market Test Switzerland, carried out by the Centre for European Economic Research (ZEW) in cooperation with the Credit Suisse, revealed somewhat diminishing economic expectations in Switzerland again in January. The corresponding ZEW CS indicator dropped 3 points to the -32.7 mark. Although the assessment of the current economic situation still remains at a high threshold, the relevant balance dipped by 1.7 points to the 85.5 level.

Inflation expectations increased slightly, with 60 percent (+ 4.6 percent) of the financial market experts surveyed anticipating further climbing rates from the already relatively high plateau. The lion\'s share of participants (63.6 percent) expects short-term interest rates to hold steady in the next six months, while nearly one-third foresees advancing rates. Compared with the previous month\'s survey results, fewer respondents predict that the Swiss Market Index (SMI) will gain terrain on a six-month horizon, while the percentage of participants who forecast a sideways stock market trend increased (+ 11.9 percent). According to the opinion of most of the experts, the Swiss franc will likely pick up further ground against most of the major currencies in the coming six months.

Positive perceptions of the Swiss economy prevailed in January as well, with the overriding majority of experts surveyed (85.5 percent) assessing the current economic picture as good. The share of respondents who view the economy as normal edged up slightly by 1.7 percentage points to 14.5 percent. None of the analysts still perceives the economic situation as bad. The relevant balance of indicators dipped to the 85.5 mark. Meanwhile, the optimistic forecast for the future trend of the overall economic climate was dampened a little. The percentage of experts who anticipate either better or constant economic momentum in the coming six months declined slightly in each case. While the majority of experts (60.0 percent) still expects the favourable economic environment to persist, the proportion of respondents who fear worsening of the outlook rose by 2.4 percentage points. Consequently, the ZEW Credit Suisse indicator of economic expectations deteriorated to the -32.7 mark (from -29.7 the previous month).

Climbing energy and fuel prices, in particular, have driven up inflation rates in recent months far above their average levels of past years. A greater share of the analysts expects inflation to continue rising: 60 percent compared with 55.4 percent in December. As a consequence, the corresponding balance of indicators increased by 5.9 points to reach 54.5.

While 55.3 percent of the respondents in the previous month\'s survey had already predicted that short-term interest rates would remain stable in the first half of 2008, in January even 63.6 percent of the experts believe interest rates will hold steady in the near term. But 32.7 percent of participants still anticipate seeing interest rate hikes, while 3.6 percent are looking for a cut in short-term rates. Regarding long-term interest rates, most of the analysts (59.3 percent) predict an increase, and a good one-third of the respondents still believe rates will remain unchanged. As seen already in previous months, the majority of the experts expects no shift in the short- and long-term interest rate differential between Switzerland and the Eurozone.

International stock exchanges kicked off the new year on a weak note under the influence of disappointing US economic data and strongly spiking oil prices. The Swiss Market Index (SMI) suffered setbacks as well. Optimism on the part of the experts surveyed regarding the future trend in share prices is somewhat more subdued compared with the previous month. Nevertheless, nearly one out of every two analysts still anticipates a positive trend in the SMI, versus 60.8 percent in the December survey. The relevant Indicator sank by 13.4 points to the 27.8 level.

The Swiss franc has gained substantial terrain against all major international currencies. Developments on the foreign exchange market point to a reduction in risk positions that had been built up in recent years in the form of so-called carry trades. Most of the experts surveyed expect the Swiss franc to continue to appreciate in the coming six months as well. The percentage of respondents who think that the Swiss currency will likely pick up ground against the euro rose by 9.6 percentage points to reach 56.4 percent. So the relevant balance of indicators increased to the 50.9 mark. A weaker British pound versus the Swiss franc is in the cards according to 51.9 percent of the analysts, up 12.4 percentage points versus the previous month. The corresponding indicator rose to the 33.3 level. As revealed already in December, the majority of participants (56.4 percent) foresees the US dollar giving up territory relative to the Swiss franc too.

Commodity markets have drawn attention in recent weeks after hitting historically high prices. After the oil price reached the 100 dollar mark, most of the experts (52.8 percent versus 43.5 percent the previous month) expect prices to decline on a six-month horizon. However, the proportion of respondents who predict that prices will continue to surge further increased by 10.8 percentage points to 15.1 percent. As already reflected in the December survey results, expectations are mixed with regard to the trend in gold prices. Although 40.8 percent of the experts forecast further climbing gold prices, one-fourth of the analysts are banking on sinking prices for the precious metal.

In the eyes of the majority of survey participants (56.6 percent), the corporate earnings situation will not change in the next six months. Nevertheless, the share of experts who view the future earnings outlook for companies in a pessimistic light rose by 8.5 percentage points. As a result, the relevant balance of indicators deteriorated to the -35.8 mark. Most of the analysts expect profit margins to remain constant (46.2 percent) or decline (50.0 percent). According to the lion\'s share of respondents (59.3 percent), the unemployment rate in Switzerland will continue to hold steady at the current low level in a six-month time frame.

Within the scope of the special question for January, the financial market experts were asked to convey their share price forecasts for various stock market indices. More than half of the respondents revealed that they expect the SMI to be trading in a range between 8,000 and 9,000 index points by year-end 2008. In addition, the experts were asked about what their ideal portfolio allocation would look like. The analysts\' preferences were focused on energy and pharmaceutical stocks, as well as the utilities and non-cyclical consumer goods sectors. 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 (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