Philipp Hildebrand: Overview of the Swiss and global economy
Introductory remarks by Mr Philipp Hildebrand, Chairman of the Governing Board of the
Swiss National Bank, at the half-yearly media news conference, Berne, 16 June 2011.
* * *
The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. The target
range for the three-month Libor remains at 0.0-0.75%, and the SNB intends to keep the
Libor within the lower part of the target range at around 0.25%.
The global economic recovery is continuing, even if the outlook has dampened somewhat in
the past few weeks. The level of capacity utilisation in the Swiss economy is rising. Despite
the strong appreciation of the Swiss franc, the economy continues to benefit from robust
international demand. However, margins in the export industry are coming under increasing
pressure. For 2011, the SNB is maintaining its forecast of real growth in Swiss GDP of
around 2%.
Overall, however, downside risks predominate. These include, in particular, the debt
problems in the euro area periphery. In addition, high deficits require several countries in
various parts of the world to undertake fiscal consolidation measures, economic fragility
notwithstanding. The recent commodity price increase weighs on global economic growth
and poses upside risks to inflation. In Switzerland, the main risks remain, on the one hand,
the effects of the strong Swiss franc on the export industry and, on the other, the danger of
overheating in the real estate sector.
Until the beginning of 2012, the path of the SNB's conditional inflation forecast lies above
that of the previous quarter's forecast. This is attributable to the assumption of higher oil
prices compared to the previous quarter and somewhat higher import prices. Assuming an
unchanged three-month Libor of 0.25% over the forecast horizon, the SNB expects average
inflation rates of 0.9% for 2011, 1.0% for 2012 and 1.7% for 2013. Over the course of 2012,
the path of the new forecast is lower than that of March because of the latest appreciation of
the Swiss franc and the slightly slower development of international growth. Towards the end
of the forecast period, inflation rises briskly and exceeds the upper bound of 2%. This shows
that the current expansionary monetary policy cannot be maintained over the entire forecast
horizon without compromising price stability in the long term. Due to the risks mentioned
previously, the conditional inflation forecast is, however, associated with a high level of
uncertainty.
Global economic outlook
Economic growth continued worldwide in the first quarter, although there were considerable
regional differences. As in the previous quarters, the emerging economies recorded the
highest growth rates. In the euro area, particularly Germany, the recovery was supported by
strong export and investment activity. In the US, by contrast, high energy prices weighed on
sentiment and held back growth. In addition, the persistent crisis on the real estate market is
hampering the economic recovery. In Japan, there was a significant decline in GDP as a
result of the earthquake.
Although the international economic outlook is somewhat less favourable than in March, the
upswing in the global economy is likely to be maintained in the months ahead. In the US, in
particular, the latest production and labour market indicators have been disappointing. Due to
the high commodity prices and the production losses in Japan, the SNB has revised its 2011
growth forecast for the advanced economies downwards to some extent. Moreover,
numerous countries are planning to undertake additional cost-cutting measures in the year
ahead. The rise in commodity prices since autumn of last year is expected to result in
significantly higher inflation worldwide in 2011.
Swiss economic outlook
According to the SECO estimate, the growth of real GDP in Switzerland slowed in the first
quarter, mainly because of the muted advance in private consumption and equipment
investment. By contrast, exports recorded a marked gain as a result of robust international
demand, particularly from Germany and Asia, despite the strength of the Swiss franc. The
strong momentum in construction also supported growth. Utilisation of technical capacity
continued to pick up and was above the long-term average in manufacturing; in the
construction sector it actually attained a record high level. The recovery on the labour market
also continued. After a massive increase during the crisis, measures introducing short-term
work have largely been retracted. In May, the seasonally-adjusted unemployment ratio
decreased to 3.0% and companies are reporting more difficulties in recruiting qualified
employees.
Due to the appreciation of the Swiss franc, export-geared companies are exposed to strong
price competition. In manufacturing, in particular, margins are under very strong pressure in
some cases. However, survey results still suggest that robust foreign demand allows for
good utilisation of capacities and supports exports. The short-term outlook also remains good
for domestic demand. Construction investment is benefiting from favourable financing
conditions, while higher capacity utilisation should stimulate equipment investment. Demand
for labour is likely to firm further. For 2011, the SNB is maintaining its forecast of real GDP
growth amounting to around 2%.
Monetary and financial conditions
Monetary conditions were again characterised by the divergence between low interest rates
and the Swiss franc, which appreciated significantly in the second quarter. Since the last
monetary policy assessment, the three-month Libor has persisted in the lower part of the
target range. With inflation expectations rising slightly, real interest rates have remained low
and even, in the short-term range, negative. In general, although long-term interest rates
have risen since their low point in August 2010, they are still at a low level.
By contrast, the real export-weighted Swiss franc appreciated further in the second quarter
and has reached an all-time high. By the beginning of May, the US dollar - mainly - had
weakened significantly against the Swiss franc. Thereafter, renewed concerns about stability
in the euro area also led to a depreciation of the euro. My colleague, Jean-Pierre Danthine,
will speak about the situation on the international financial markets in more detail later on.
The SNB is concerned about exchange rate developments. The SNB forecasts are based on
the premise that the exchange rate developments will stabilise in the medium term. Should
the exchange rate again be subject to significant changes, a reassessment of the inflation
outlook would be required.
Since the last monetary policy assessment, the M2 and M3 aggregates have been growing
at about 7% year-on-year. Some of this high growth rate is attributable to the current low
interest rates. Overall, ample liquidity is available in the economy and this means potential
risks for price stability in the long term.
Mortgage lending has also continued to increase substantially, growing at a rate of 4.7% in
April. In an environment of low interest rates and substantial advances in real estate prices, a
high rate of growth in mortgages can harbour risks for financial stability. In the speech that
follows, my colleague Thomas Jordan will outline for you the SNB's Financial Stability
Report. In view of the potential risks for the financial sector, the SNB continues to closely
observe the situation on the mortgage and real estate markets.
Chart of conditional inflation forecast
The (dashed) red curve on the chart represents the new conditional inflation forecast. It
shows the future path of inflation, assuming that the three-month Libor remains constant at
0.25% over the next twelve quarters, and it covers the period from the first quarter of 2011 to
the first quarter of 2014. For purposes of comparison, the (dash-dotted) green curve shows
the conditional inflation forecast published in March, which was also based on the
assumption of a three-month Libor of 0.25%.
Until the beginning of 2012, the path of the SNB's new conditional inflation forecast lies
above that of the previous quarter's forecast. This is attributable to the assumption of higher
oil prices compared to the previous quarter and somewhat higher import prices. The
significant increase in the third quarter of 2011 is due to a base effect, because inflation in
the corresponding quarter of 2010 was comparatively low. In addition, a one-off statistical
effect can be expected in the third quarter of 2011. This is attributable to more frequent data
collection in the case of prices for clothing and shoes; it also accounted for an increase in
inflation in the first quarter. During the course of 2012, the path of the new forecast falls
below that of March, due to the slowdown in inflation attributable to the latest appreciation in
the Swiss franc. Towards the end of the forecast period, inflation rises briskly and exceeds
the upper bound of 2%. This shows that the current expansionary monetary policy cannot be
maintained over the entire forecast horizon without compromising price stability in the long
term. Due to the risks mentioned previously, the conditional inflation forecast is, however,
associated with a high level of uncertainty.
Conditional inflation forecast of March 2011 and of June 2011
Percentage change in national consumer price index from previous year
Inflation Forecast March 2011 (with Libor at 0.25%) Forecast June 2011 (with Libor at 0.25%)
%
3
2.5
2
1.5
1
0.5
0
-0.5
2008 2009 2010 2011 2012 2013 2014
Observed inflation June 2011
2008 2009 2010 2011 2008 2009 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
I nf lat ion 2.5 2.7 3.0 1.6 0.0 -0.7 -1.0 -0.2 1.1 1.0 0.3 0.3 0.6 2.4 -0.5 0.7
Conditional inflation forecast of March 2011 with Libor at 0.25% and of June 2011 with Libor
at 0.25%
2011 2012 2013 2014 2011 2012 2013
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Forecast March 2011,
0.4 0.5 1.2 1.0 0.9 1.0 1.1 1.3 1.5 1.8 2.1 2.5 0.8 1.1 2.0
Libor at 0.25%
Forecast June 2011,
0.5 1.4 1.3 1.0 0.9 1.0 1.2 1.4 1.6 1.8 2.2 2.6 0.9 1.0 1.7
Libor at 0.25%
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