Jean-Pierre Roth: Global and Swiss economic outlook
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, 10 December 2009.
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By and large, our assessment of the economic and monetary situation is the same as in
September 2009, with economic and financial developments running according to
expectations. Risks remain significant, and for this reason we are maintaining our
expansionary monetary policy.
Global economic outlook
Before I address the outlook for the Swiss economy, allow me to briefly examine economic
developments at the international level, since they affect the outlook for Switzerland.
Signs of a recovery in global economic activity gathered strength during the second half of
2009. The ongoing normalisation of conditions on the interbank and financial markets,
together with the monetary and fiscal stimuli, supported a recovery in production, especially
in the manufacturing industry.
However, the legacy of the crisis still weighs heavily. The economic rebound of the past few
months is largely the result of public sector intervention, and is not yet anchored firmly
enough. Except in emerging Asia, the rebound has only partly redressed the losses
sustained in 2008 and early 2009. Capacity utilisation rates are still generally low, and
access to bank lending remains difficult in some countries. Moreover, both the labour market
situation and the need to restore savings levels are weighing on household consumer
spending. Therefore, we still hold the view that the return to global equilibrium will be slower
and more uncertain than is usually the case at the end of a recession.
Swiss economic outlook
The Swiss economy is also on the road to recovery: Swiss GDP growth turned positive in the
third quarter. However, value added continued to contract in the manufacturing industry.
Overall, demand for labour is still falling and unemployment numbers are on the rise.
We are projecting a moderate recovery for 2010. Private consumption growth will be held
back by weak household income growth. Exports will benefit from a gradual return to
strength of external demand. This should allow manufacturing production to recover, albeit
unevenly across the different segments. In particular, new orders in the equipment goods
segment will probably continue to suffer from the excess capacity at the international level. In
Switzerland, too, the increase in manufacturing production will not be enough to allow excess
production capacity to be reabsorbed. Consequently, equipment investment is unlikely to see
any improvement for several quarters, and there could be a fall in the number of
manufacturing jobs. In the construction industry, on the other hand, where the degree of
resource utilisation is more than satisfactory, demand should stabilise.
For 2010 as a whole, the SNB expects real GDP growth of between 0.5% and 1%, following
a decline of around 1.5% in 2009.
Changes in monetary and financial conditions
Overall, monetary conditions are a reflection of our expansionary policy, especially with
respect to interest rates and the monetary aggregates.
The Libor is currently at the level targeted since March this year, i.e. 25 basis points, a level
which can be regarded as a floor. The fact that it was impossible to bring the rate down any
lower than this led us, in March, to introduce other instruments in order to make our
monetary policy as expansionary as the circumstances demanded.
Monetary conditions have become more expansionary via the interest rate channel in
particular. Indeed, credit premia on the capital markets have declined steadily since the
beginning of the year. As yields on Confederation bonds have remained low, other long-term
yields have also trended downwards. It has thus become cheaper for companies to raise
funds by borrowing on the capital market. In addition, our figures show that financing in the
form of bank loans has also become more attractive following the decline in the Libor. In real
terms - i.e. after factoring in expected inflation - interest rates are even lower.
The Swiss franc has appreciated slightly in trade-weighted terms, as a result of the recent
weakening of the dollar. However, it has remained stable against the euro, which shows that
the monetary policy followed since March has been effective. An appreciation of the Swiss
franc against the euro would run counter to the relaxation in monetary conditions brought
about through the interest rate channel. This is why the SNB will continue to act decisively to
prevent any excessive appreciation of the Swiss franc against the euro.
An assessment of monetary conditions can be misleading if it is based on prices, which, like
currently the libor, have reached a bound. For this reason, an assessment based on
quantities - money and credit - is particularly important in the current circumstances.
The monetary base has increased substantially since October 2008, when the financial crisis
entered a new phase following the collapse of Lehman Brothers. We supplied the interbank
market with sufficient liquidity to meet burgeoning demand in a climate of uncertainty, in
order to prevent any increase in money market rates. Since then, precautionary base money
demand has declined and we have reabsorbed liquidity accordingly. The monetary base has
thus fallen by 28% compared to the peak recorded in April 2009. The level of sight deposits
is, however, still almost ten times higher than before the crisis. There is thus a risk of
excessive money creation once confidence is restored.
Monetary conditions should not be judged in terms of banking sector liquidity, but rather on
the basis of the liquidity available to households and firms - i.e. the monetary aggregates.
M3 growth, which had been modest for a long time, has accelerated. In October, it reached
an annual rate of 7.7%. M1 and M2 have shown strong growth. The significance of these
growth rates is limited because the uncertainty linked to the crisis reinforced the general
public's preference for liquidity, and because interest rates are at extremely low levels. It is
therefore useful to analyse the transmission of monetary stimuli through the lending channel
as well.
Mortgage loans provide a particularly good reflection of the effects of monetary policy. Why?
Essentially, mortgage loans are used to finance real estate projects. But the yields on these
investments, which are by their very nature long-term, are heavily dependent on the level of
interest rates. This relationship has been confirmed once again: no sooner did we cut interest
rates than the growth rate of mortgage loans began to increase more strongly. Having hit a
low of 3.2% in November 2008, the growth rate then began to accelerate steadily, reaching
5.1% in October 2009. In the same month, other lending in Swiss francs declined at a rate of
-0.3%, which is normal during a period of weak economic activity. All in all, lending to
households and firms, both large and small, has continued to grow over the past few months,
as the growth in mortgage lending has largely offset the drop in other lending.
According to the latest SNB bank lending survey, the phase of tightening lending conditions
could be coming to an end. The share of banks reporting a further slight tightening of
conditions for corporate lending has fallen considerably, from 40% at the time of the previous
quarterly survey to 3% for this quarter. Households appear to be benefiting from a similar
trend, as no banks have announced a tightening of their lending conditions for households,
whereas in the previous quarter 50% of banks reported a further slight tightening of lending
conditions for non-mortgage loans and 20% for mortgage loans to households.
The survey also suggests that demand for loans has stabilised. The share of banks
experiencing increased household demand for mortgages has fallen from 40% at the
beginning of this year to 10%.
The situation in Switzerland is thus very different to that observed in other economies. Not
only is there no credit crunch, but we have also witnessed a substantial increase in the
volume of mortgages. There are also signs of a relaxation in lending conditions for mortgage
loans. We would like to sound a note of caution, both to banks and to firms and households,
as regards the risks inherent in a relaxation of discipline in real estate financing.
Inflation outlook
Monetary policy influences the medium and long-term inflation outlook. By contrast, it has
very little effect on short-term developments. The past two years have been a perfect
illustration of this. Inflation peaked at 3.1% in July 2008, before plummeting to -1.2% in July
this year. This reflects extreme movements in oil prices, which reached USD 145 a barrel in
July 2008, only to fall to USD 35 in December of the same year. The temporary nature of
fluctuations in inflation was correctly anticipated, as evidenced in our previous inflation
forecasts. Since it takes time for the impact of monetary policy to feed through, it would have
been futile to attempt to counter these movements.
The path of inflation in the near term will be largely dictated by recent movements in oil
prices and the associated base effects. Inflation will already return to positive figures from the
end of this year. This is mainly due to the base effect linked to the USD 35 low reached by oil
prices in December 2008. Inflation will tend to decline thereafter, despite the recovery in
growth. In fact, economic activity will remain subdued and will return only gradually to
normal. Inflation will nevertheless remain positive throughout 2010. Assuming that our
monetary policy remains unchanged, our new forecast shows that inflation will begin to
increase again from the beginning of 2011, to reach 2% in the first half of 2012. Our
expansionary monetary policy cannot be maintained indefinitely without incurring inflation
risks.
Considerable uncertainty remains attached to this inflation forecast. Global economic
developments could be less favourable than I described in the first section of my remarks.
The financial crisis could reappear.
Monetary policy decision
The inflation outlook has not changed since the September assessment. It confirms that the
expansionary monetary policy cannot be maintained for the next three years because price
stability will be compromised in the long term. However, a swift correction in monetary policy
would be precipitate since the inflation outlook is still associated with downside risks. If these
risks materialised, we could again be faced with the threat of deflation. The uncertainties
relate to the global economy and to the level of recovery within the financial industry. These
factors have persuaded the SNB to opt for a cautious stance, and it is leaving its monetary
policy course unchanged for the time being.
Strengthening the SNB's equity capital
On 4 December, the SNB Bank Council decided to strengthen the SNB's equity capital by
doubling the allocation to provisions over the next five years. This decision was prompted by
the growth in market and credit risks in the SNB's balance sheet (creation of the SNB
StabFund and the increase in currency reserves). Given the high level of the distribution
reserve and results expected for 2009, this decision should not pose problems in terms of the
distribution of profits, in the amount of CHF 2.5 billion annually, up to the end of the period
agreed with the Confederation and the cantons (2017). My colleague Thomas Jordan will
address these aspects in more detail in his own introductory remarks.