Philipp Hildebrand: Global and Swiss economic outlook - overview for
2011/12
Introductory remarks by Mr Philipp Hildebrand, Chairman of the Governing Board of the
Swiss National Bank, at the end-of-year media news conference, Berne, 15 December 2011.
* * *
The Swiss National Bank (SNB) reaffirms its commitment to the minimum exchange rate of
CHF 1.20 per euro. It will continue to enforce this minimum rate with the utmost
determination. It is prepared to buy foreign currency in unlimited quantities. The target range
for the Libor remains at 0.0-0.25%, and the SNB continues to aim for a three-month Libor
close to zero. Even at the current rate, the Swiss franc is still high and should continue to
weaken over time. The SNB stands ready to take further measures at any time if the
economic outlook and the risk of deflation so require.
In the third quarter, the global economy picked up again slightly, thanks to positive stimuli
from Japan, the US and China. Growth in Europe, however, remained weak and the
economic outlook for the euro area deteriorated. In Switzerland, the pace of growth slowed
considerably in the third quarter. The substantial appreciation of the Swiss franc over the
summer is weighing heavily on the Swiss economy. For 2011 as a whole, real GDP growth of
1.5-2.0% can be expected. This is only because of the favourable economic development in
the first half of the year. For 2012, the SNB is expecting economic growth in the order of
0.5%.
The international outlook continues to be highly uncertain. A further escalation of the
European sovereign debt crisis cannot be ruled out. This would have grave consequences
for the international financial system. Moreover, given our country's close relations with the
euro area, Switzerland's economic prospects are highly dependent on how the crisis
develops.
Compared to the previous quarter, the SNB's conditional inflation forecast has once again
been adjusted downwards. In the short term, inflation will dip into negative territory sooner,
owing to the effects of the earlier currency appreciation, which have been stronger than
expected. In the longer term, the worsening of the growth outlook for the euro area is
dampening inflation. The forecast for 2011 shows an inflation rate of 0.2%. For 2012, the
SNB is expecting inflation of -0.3% and for 2013, of 0.4%. These forecasts are based on the
assumption of a three-month Libor of 0% and a depreciating Swiss franc. In the foreseeable
future, there is no risk of inflation in Switzerland. If foreign demand were to fall off more
sharply than expected, downside risks to price stability would emerge.
Global economic outlook
Following a very weak second quarter, the global economy picked up again slightly in the
third quarter, benefiting from the resumption of production following the earthquake disaster
in Japan. The decline in commodity prices during the third quarter also had a positive effect.
In Japan, the US and China in particular, aggregate economic activity strengthened slightly.
In the euro area, on the other hand, economic growth was weak.
The outlook for global growth is nevertheless subdued, and has, if anything, deteriorated
since the last monetary policy assessment. The most recent US economic data have been
somewhat better than expected, but the escalation of the European debt crisis has clouded
the economic outlook for the euro area. Bond yields for fiscally weak states have risen
markedly. The growing unease among market participants is also reflected in the increased
volatility on the financial markets. Mounting borrowing costs and the high level of uncertainty
are contributing to a marked worsening of the business climate in the euro area.
The SNB has adjusted its growth assumptions for the euro area over the next three years
substantially downwards. For the rest of the world, on the other hand, our forecasts remain
essentially unchanged. Uncertainty about the future outlook for the global economy remains
extremely high. In particular, the European sovereign debt crisis poses grave risks for the
international financial system and the real economy.
Swiss economic outlook
In Switzerland, the pace of growth slowed considerably in the third quarter. According to
preliminary estimates, annualised real GDP increased by only 0.9%. In particular, the
substantial appreciation of the Swiss franc over the summer is weighing heavily on the Swiss
economy. Exports fell sharply. At the same time, domestic final demand stagnated.
The economic slowdown was accompanied by a slight decrease in technical capacity
utilisation. In manufacturing, it is now around the long-term average. In the construction
industry, it has declined slightly, but remains at a very high level. Narrow profit margins and
mounting concerns over the international outlook held companies' demand for labour in
check.
The introduction of the minimum exchange rate has corrected the massive overvaluation of
the Swiss franc and has given companies a sounder basis for their investment planning. This
notwithstanding, the situation for a big part of the economy remains difficult. Waning global
demand will continue to hold back export growth. Economic uncertainty, coupled with a
difficult earnings situation for many companies, will curb corporate investment. Moreover,
since October, the seasonally adjusted unemployment figure has risen again slightly. The
deterioration in the labour market should constrain both consumer spending and investment
in residential construction.
It is likely that the Swiss economy will stagnate in the fourth quarter. For 2011 as a whole,
real GDP growth of 1.5-2.0% can be expected. This is only because of the favourable
economic development in the first half of the year. For 2012, the SNB is expecting economic
growth in the order of 0.5%.
Monetary and financial conditions
In October and November, inflation turned negative, a development largely driven by the
strong appreciation of the Swiss franc during the summer. Prices for a large number of
tradable goods fell markedly. Following the introduction of the minimum exchange rate, the
SNB is expecting temporarily negative inflation rates, but not a sustained decline in the
general price level. Moreover, surveys also show that medium-term inflation expectations are
still positive.
As a result of the substantial expansion of liquidity to combat the strength of the Swiss franc
in August, some short-term interest rates turned negative. They have been close to zero
since the previous monetary policy assessment. Long-term interest rates also declined
further. The yield on ten-year Confederation bonds reached a new low. The expansionary
effects of monetary policy are also evident in the growth of the money supply and in real
interest rates, which have remained at a low level.
Since the introduction of the minimum exchange rate on 6 September 2011, the Swiss franc
exchange rate to the euro has been above CHF 1.20. Compared to August, the Swiss franc
has even depreciated more against the US dollar than against the euro. Nevertheless, even
at the current exchange rate, the Swiss franc is still high.
In August, the SNB had substantially expanded Swiss franc liquidity, in order to weaken the
heavily overvalued Swiss franc. Since then, banks' sight deposits with the SNB have been at
historically high levels. The SNB will continue to maintain liquidity at exceptionally high
levels, but has decided not to set a specific target level for sight deposits at present. My
colleague Jean-Pierre Danthine will discuss the SNB's liquidity measures and their effects in
more detail.
Both domestic mortgages and corporate lending in the real economy have continued to see
robust growth. In the third quarter of 2011, lending standards and conditions for mortgages
remained largely unchanged. By contrast, banks reported a slight tightening of lending
standards and conditions for corporate loans - especially loans to large companies. Low
interest rates continue to have a favourable effect on the demand for loans. In addition, the
robust growth in real estate prices, particularly prices for owner-occupied apartments,
continued unabated in the third quarter. In this context, the SNB welcomes the recent
advances achieved in Switzerland with the introduction of macroprudential instruments. My
colleague Thomas Jordan will report on developments in the area of financial stability and
macroprudential policy.
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 unchanged at
0% over the next twelve quarters, and it covers the period from the fourth quarter of 2011 to
the third quarter of 2014. For purposes of comparison, the (dash-dotted) green curve shows
the conditional inflation forecast published in the previous quarter, which was also based on
the assumption of a three-month Libor of 0%.
Until the second quarter of 2012, the SNB's new conditional inflation forecast is below the
previous quarter's forecast. This is because the earlier Swiss franc appreciation impacted on
prices more quickly than expected. From the third quarter of 2012, inflation rises above the
previous forecast, because at this point the negative base effect of price declines since
mid2011 disappears. The muted course of inflation from the end of 2012 stems from the marked
deterioration in the economic outlook for the euro area. Overall, despite the expansionary
monetary policy, there are no signs of inflation risks over the forecast horizon.