Philipp Hildebrand: Global and Swiss economic outlook
Introductory remarks by Mr Philipp Hildebrand, Chairman of the Governing Board of the
Swiss National Bank, at the end-of-year media news conference, Zurich, 16 December 2010.
* * *
The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. It is
leaving the target range for the three-month Libor unchanged at 0.00-0.75%, and intends
to keep the Libor within the lower part of the target range at around 0.25%.
The global economic recovery is continuing. While the growth dynamic in emerging
economies is vigorous, the recovery in the industrialised economies remains modest
overall. Growth in Switzerland was robust in the third quarter of 2010, but the weakening
of exports, in particular, points to a significant reduction in growth in the quarters ahead.
The SNB expects GDP to grow by some 1.5% in 2011, following growth of about 2.5% in
the current year.
Monetary policy operates in an environment of heightened uncertainty. Concerns about
stability in the euro area have led to renewed financial market tensions. Against this
backdrop, the Swiss franc has again appreciated. Should these tensions be exacerbated
and put a strain on economic developments in the euro area, this would also have a
detrimental effect on the Swiss economy. If a deflation threat emerges, the SNB would
take the measures necessary to ensure price stability.
The SNB's conditional inflation forecast for 2012 and 2013 is slightly below the
September forecast. This correction is the result, in particular, of the less favourable
economic outlook for Europe compared with the last assessment. For 2011 it is marginally
higher, due mainly to a higher price for oil. Assuming an unchanged three-month Libor of
0.25%, average inflation for 2010 is expected to amount to 0.7%, for 2011 to 0.4% and
for 2012 to 1.0%. The conditional inflation forecast shows that there is no threat to price
stability in the short term. However, the rising path in 2012 and 2013 shows that the
current expansionary monetary policy cannot be maintained over the entire forecast
horizon without compromising long-term price stability. The inflation forecast is still
associated with a very high level of uncertainty.
Global economic outlook
I would now like to take a closer look at the economic situation and at monetary
conditions.
Overall, the recovery in the global economy continued, encouraged by expansionary
economic policies and vigorous economic activity in the emerging economies. In the euro
area, however, growth slowed markedly in the third quarter. The favourable
developments in Germany's economy differ from those in the peripheral countries of the
euro area, with their weak growth. The recent financial market turmoil is likely to hamper
activity in the euro area. Although domestic demand is gradually firming up in the US, the
momentum is insufficient for a sustainable reduction in unemployment, which remains
high. In addition, construction investment is suffering from the situation on the real estate
market. Consequently, GDP growth in the US will remain modest. The vigorous
economic momentum in the emerging economies is likely to provide positive stimulus for
global growth in the future.
The SNB has made slight downward revisions to its growth forecasts for the global
economy, mainly for Europe in 2011 and 2012. Uncertainty with regard to global economic
developments remains very considerable and the risks are still to the downside.
Swiss economic outlook
Growth of the Swiss economy remained robust in the third quarter. Consequently,
utilisation of production factors increased. Technical capacity utilisation has returned to a
normal level in manufacturing, while in the construction industry it is in fact considerably
higher than the long-term average. Employment also increased moderately and
unemployment declined further. However, the indications of a significant slowdown in
growth increased. Goods exports stagnated from June to October, mainly due to weaker
demand from Europe. Exports of services declined most recently.
Inflation, as measured by the national consumer price index, fell to 0.2% in November.
The decrease over recent months is mainly attributable to the fall in the prices of imported
consumer goods. Accordingly, the core inflation indices calculated by the SNB were
somewhat higher, and have remained steady since the last monetary policy assessment.
For the coming months, the SNB expects economic growth to continue. However, it is
likely to be significantly lower in the quarters ahead - a development attributable to both
the generally subdued economic activity in the industrialised countries and the
appreciation of the Swiss franc. Consequently, the SNB expects GDP to grow by some
1.5% in 2011, following growth of about 2.5% in the current year.
Monetary and financial conditions
Monetary and financial conditions in Switzerland are shaped by the expansionary
monetary policy. Since mid-September, the three-month Libor has remained fairly
constant within the lower part of the target range. Yields on high-quality Swiss bonds
remain at a low level, despite the latest increase. This also applies to long-term real
interest rates, which are ultimately decisive in investment and consumption decisions.
Historically low interest rates for corporate loans and mortgages also create conditions
which stimulate domestic final demand.
Concerns about stability in the euro area have led to renewed financial market tensions.
Against this background, the Swiss franc has again appreciated. As shown in the survey
carried out by the delegates of the SNB regional contact network and published next
week in the Quarterly Bulletin, business activities of numerous companies are hampered
by this development. An aggravation of the crisis in the euro area would inevitably have
further negative consequences for the Swiss economy.
As my colleague, Jean-Pierre Danthine, will outline in more detail later,
liquidityabsorbing operations have continued since the monetary policy assessment of
September 2010. As a result, bank sight deposits with the SNB have fallen further.
Nevertheless, the monetary base is still significantly higher than its level prior to the
financial crisis. The broader monetary aggregates have continued to expand strongly
since the last assessment, and pose a potential threat to long-term price stability.
In view of the expansionary monetary conditions, lending business remained brisk.
According to the SNB survey on bank lending, banks maintained their lending standards
for companies and households in the third quarter of 2010. Several banks reported that
household demand for mortgages increased again. This is reflected in the continued high
growth rate of mortgage volume. Moreover, real estate prices continue to rise. The situation
on the mortgage and real estate markets still requires the full attention of the SNB.
Since the beginning of the financial crisis, the SNB balance sheet has lengthened
considerably and its composition has changed, in particular due to the SNB's foreign
exchange market interventions. Since the beginning of 2010, the balance sheet total has
increased from CHF 207 billion to some CHF 280 billion. Moreover, the significant
appreciation in the Swiss franc has resulted in considerable exchange rate losses on the
SNB's foreign currency investments. My colleague, Thomas Jordan, will take a closer
look at the risks for the SNB associated with the lengthening of the balance sheet.
After the beginning of the financial crisis, the SNB lowered money market interest rates
to virtually zero. Despite these decisive reductions in interest rates, the Swiss economy
faced the threat of deflation from March 2009 onwards. This required the SNB, as part of
its mandate, to undertake a further monetary policy easing. In view of the limited size of
the domestic capital market compared to other countries, foreign currency purchases
seemed the most appropriate course of action for Switzerland. This allowed for the
absorption of extreme exchange rate developments, which could have triggered a
deflationary dynamic. In absorbing the upward pressure on the Swiss franc, the SNB
may have taken on a higher balance sheet risk, however, in doing so, it countered the
risk of a deflationary trend.
Although the Swiss franc has appreciated sharply since the beginning of the year, the
deflation threat has declined as the economic recovery has strengthened. The appreciation
of the Swiss franc has impaired the competitive position of Swiss exporters. However,
the negative impact on export demand has been reduced by robust economic growth in
the economies importing Switzerland's goods and services.
Chart of conditional inflation forecast
I would now like to comment on the new, conditional inflation forecast in more detail.
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 entire forecast horizon, and it covers the period from the fourth quarter
of 2010 to the third quarter of 2013. For purposes of comparison, the (dash-dotted) green
curve shows the inflation forecast published in September, which was also based on the
assumption of a three-month Libor of 0.25%.
The new conditional forecast shows that inflation remains low for 2011 and 2012. The
forecast for the next few quarters is revised because new data has been taken into
account. The new forecast for 2011 is slightly above that published in September
because the oil price has increased. The increase in inflation in the third quarter of 2011
is attributable to a base effect, because inflation in the third quarter of 2010 was
comparatively low. Compared to the forecast published in September, inflation in 2012
and 2013 rises less steeply, particularly due to the fact that the economic outlook for
Europe is less favourable than in the previous quarter. Towards the end of the forecast
horizon, inflation rises briskly and exceeds the upper bound of 2%, assuming that the
three-month Libor remains at the current level. This shows that the current expansionary
monetary policy cannot be pursued for the entire forecast horizon without compromising
long-term price stability. Due to the risks mentioned previously, this forecast is
associated with a very high level of uncertainty.
BIS Review 173/2010