Jean-Pierre Roth: Review of the Swiss economy
Introductory remarks by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National
Bank, at the end-of-year media news conference, Zurich, 13 December 2002.
* * *
The National Bank has decided to leave the target range for the three-month Libor rate unchanged at
0.25%-1.25%. For the time being, the three-month Libor is to be kept in the middle of the target range.
Owing to the low level of inflation, we have been able to ease monetary policy substantially since
March 2001, having since then lowered the target range for the three-month Libor by a total of
2.75 percentage points. We took decisive steps in response to declining economic growth and the
upward trend of the Swiss franc. Interest rates were last lowered on 26 July of this year. The
imponderables with respect to the development of the global economy remain considerable, and a
sustained economic upswing in Switzerland is not likely until some time in the second half of 2003. We
are therefore maintaining our expansionary monetary policy and shall keep the attractiveness of Swiss
franc investments low. This does not jeopardise price stability. Assuming that the three-month Libor
rate will remain stable at 0.75%, average annual inflation is expected to lie between 0.7% and 1.6% in
the next three years. For 2003, we are anticipating economic growth of just over 1%, while zero growth
is to be expected in the current year.
Economic activity
In Switzerland, economic activity has stabilised somewhat in the last two quarters despite the delay in
the global economic upswing. After having been on a decline during four quarters, GDP slightly
exceeded the previous period's level in the second and third quarters 2002. Positive stimuli emanated
from the development of exports and from consumption.
Nevertheless, the economic situation in Switzerland remains tight. The deterioration on the labour
market and the fall in stock market prices are depressing consumer sentiment and available income.
Incoming orders and the order backlog in the export sector remain at an unsatisfactory level, a sign
that the recovery in exports is still uncertain. Capacity utilisation in manufacturing and in construction
continues to fall short of the desired level, while corporate investment activity is currently at a very low
ebb.
The present growth slump in Switzerland can only be overcome if both exports and equipment
investment increase consistently. We expect exports to grow markedly in line with the international
economic upswing in the second half of 2003. Equipment investment should follow with a slight time
lag. Until the middle of next year, however, the Swiss economy is likely to grow only very moderately.
Until then, unemployment could therefore continue to rise. Private consumption, which has long been
the mainstay of economic activity, will pick up only slowly next year. Real economic activity should
increase by just over 1% in 2003, while for this year we expect zero growth.
Inflation forecast
I shall now turn to the course of inflation and our new inflation forecast. Our inflation forecast of June
2002 (the green dash-dotted curve in the graph) shows that at that time we assumed, based on a
stable three-month Libor rate of 1.25%, that inflation would gradually rise to 1.9% in the first quarter
2005.
Year-on-year inflation, as measured by the national consumer price index, dropped to 0.3% in the third
quarter 2002 from 0.7% in the second quarter. In October and November it rose to approximately 1%.
These fluctuations are due mainly to changes in the exact points in time when data on clearance sales
prices are collected. This is also the main reason why our forecast of June 2002 over-estimated the
development of inflation in the third quarter 2002.
Our new inflation forecast (red dashed curve) is based on the assumption that growth in the US will
pick up again from the second quarter 2003 onward. The US economy is likely to achieve its growth
potential stepwise until the beginning of 2004. In the EU, the upswing will take a little longer. We are
not expecting a significant acceleration of growth before the end of 2003. We assume that the
dollar/euro rate will remain at about the current level and that the oil price will be around $25 per
barrel.
On the assumption that the three-month Libor rate will remain stable at 0.75% during the next three
years, inflation should average 0.7% in 2003, move up to 0.9% in 2004 and reach 1.6% in 2005.
Forecast inflation will remain below 1% until the end of 2004 except in the fourth quarter of 2002. In
the course of 2005, however, a marked acceleration will set in, with forecast inflation reaching the 2%
mark in the fourth quarter of 2005.
The new forecast is consistently below that of June 2002. It reflects the delay in the economic
upswing. In the new forecast, inflation will rise more markedly at the end of the forecasting horizon due
to an even more expansionary monetary policy since June.
Expansionary monetary policy to be continued
At our last media conference, I pointed out that the National Bank must be prepared to react quickly to
changes in the economic situation. When the delay in economic recovery became discernible in
summer, we acted immediately by again lowering interest rates. Since then, nothing of basic
significance has changed in our assessment of the situation. We shall adhere to our expansionary
monetary policy in the foreseeable future. We will thus contribute to the economic rebound and
continue to keep Swiss franc investments unattractive. The low interest rate level and the relatively
strong growth of monetary aggregates currently do not represent a threat to price stability. Once a
sustained economic recovery becomes discernible, we shall have to review our monetary policy and
adjust it to the new circumstances. There is still no sign, however, that the time for this is approaching.
On the contrary, the risks still point downward. Should the recovery in the US and in Europe be
delayed or should the Swiss franc appreciate markedly, the expected upswing in Switzerland would be
threatened. In such a case, the National Bank is ready to react by appropriate means. Under present
conditions, however, our monetary policy is sufficiently expansionary.
Currently, the risk of deflation is being widely discussed. As can be seen from our forecast, this risk is
likely to be negligible in Switzerland in the medium term. Certainly, in the short term it is always
possible for special effects, e.g. a marked reduction in the oil price, to lead to negative inflation rates in
individual quarters. Nevertheless, we consider a continuously falling price level in conjunction with a
strong decline in the demand for goods and in production improbable in the present circumstances.
Our expansionary monetary policy and the flexibility of the Swiss economy would prevent such a
development.
In the present situation, however, other efforts are needed besides an expansionary monetary policy in
order to maintain or to enhance the attractiveness of Switzerland as an industrial and business centre.
The efforts aimed at a further liberalisation of the domestic economy may not be abandoned. Sectors
suffering from structural problems must improve their competitiveness by means of consistent
adjustments.
Our experience with the monetary policy concept
Let me briefly describe the experience gained with our monetary policy concept. We introduced this
concept exactly three years ago. You are acquainted with the main elements: definition of price
stability, inflation forecast as main indicator and target range for the three-month Libor rate as
operational target.
Overall, our experience with our monetary policy concept has been good. Recently, this experience
was discussed at an internal conference. Since the new concept was adopted, we have widened the
basis of our monetary policy decisions and further developed our analysis of indicators and models.
The more extensive use of relevant information enabled us to react more swiftly and with more
foresight than formerly to changes in the economic situation.
Our monetary policy concept met with a positive public reception in Switzerland. The same applies to
the financial markets and international organisations such as the IMF and the OECD. The concept has
vastly improved transparency. By publishing studies on internal decision-making processes and the
forecasting models used, we have made further relevant information accessible. The public is thus in a
better position to understand the reasoning behind monetary policy decisions.
So far, we have published our inflation forecasts regularly in June and December. We should like to
take this a step further and will in future publish an updated inflation forecast after every quarterly
assessment of the situation. This will further help to improve transparency. From 2003 onwards, we
will also inform the public of our monetary policy by publishing new inflation forecasts in March and
September. As in the past, we shall present our June and December inflation forecasts at our media
conferences. In March and September, the inflation forecast will be published within the context of the
press release on the quarterly assessment of the situation.
Gold sales
On 22 September this year, the Swiss people and the cantons rejected both the gold initiative and the
counter-proposal. The National Bank, however, continues to implement its programme for the sale of
half of its gold reserves. For the time being, the surplus gold reserves will still figure in our balance
sheet. To date, approximately 660 tonnes of a total of 1,300 tonnes of gold have been sold. We see no
reason to change our strategy: these assets are surplus reserves which are no longer needed for
monetary policy and which may be put to another use. In order to use the reserves for other purposes,
the gold is sold and the proceeds are invested in securities.
We invest the proceeds from the gold sales in Swiss and foreign securities. The portfolio from the
surplus reserves is thus less exposed to exchange rate fluctuations than the foreign exchange
reserves. The earnings deriving from invested gold proceeds flow into the SNB's income statement
and thus become available for profit distribution in favour of the Confederation and the cantons. As
from 2003, annual profit distribution will amount to Sfr 2.5 billion. The profit distribution agreement
concluded with the Confederation last April need not be revised. It already provides for an automatic
revision of the situation in the event that the National Bank's earnings should permanently exceed the
expected level.
Inflation Forecast December 2002 with Libor at 0.75% 2002 2003 2004 2005
Annual average inflation in % 0.7 0.7 0.9 1.6