The FINANCIAL — Credit Suisse economists published the second issue of the quarterly publication ‘Monitor Switzerland’. They have left the current growth forecast for gross domestic product (GDP) unchanged at 2,0% for 2014, according to Credit Suisse AG.
In view of the continued low interest rate environment, the real estate market remains overheated in some areas, and growth in mortgage lending still exceeds GDP growth by a significant margin. They therefore expect an increase in the countercyclical capital buffer. By contrast, the low interest rate environment is not providing much of a stimulus for capital spending on machinery and equipment. As far as the immigration debate is concerned, a statistical analysis conducted by Credit Suisse economists shows that a migration system based on supply and demand helps to strengthen the efficiency of the Swiss economy while, at the same time, alleviating the problem of unemployment during economic downturns. A quota-based system would be clearly disadvantageous on both counts.
In the coming year, Swiss companies are once again likely to make only modest investments in their business despite the low interest rate environment, according to Credit Suisse AG. Credit Suisse economists expect capital spending on machinery and equipment to increase by 2.5% in 2014, following a rise of 0.7% in 2013. The main reason for this persistent below-average growth in investment in Switzerland is the continued weak demand for exports. Although the export industry is likely to have passed the low point in the cycle at the start of 2014, a combination of excess capacity and uncertainty – including with respect to the future of Switzerland as a business location – is holding companies back from investing more strongly. For that reason, companies will mainly restrict themselves to rationalization and replacement expenditure. According to a survey conducted together with procure.ch, the Swiss Association for Purchasing and Supply Management, the vast majority of companies (85%) will once again maintain record liquidity buffers in 2014.
The zero interest rate policy of the Swiss National Bank (SNB) is having a decisive impact on the real estate market, since the historically low mortgage interest rates that this policy entails have been fueling the property boom. A slump in the real estate market could cause problems not just for homeowners but, above all, for the banks that supply credit. In mid-2012, as part of a self-regulation initiative, the banks responded to these risks to financial stability by setting out stricter guidelines for borrowers as well as a repayment obligation. In the case of private households, this has already led to a slight decline in the growth in mortgage lending, thus helping to start stabilize the situation. In addition, just under a year ago – following a recommendation by the SNB – the Swiss Federal Council announced that it would activate the countercyclical capital buffer, which took effect on September 30, 2013. In their ‘Monitor Switzerland’ publication, Credit Suisse economists show that this capital buffer has resulted in an additional equity capital requirement among banks of almost CHF 2 billion, or 1.3% of their entire equity capital as at the end of 2012. However, the capital buffer has yet to impact mortgage borrowers. Credit Suisse economists are concerned by the finding that mortgage lending to small and medium-sized enterprises (SMEs) is growing disproportionately, despite all the measures taken to address this. This trend would suggest that the risks to financial stability have not yet been fully eliminated. Accordingly, Credit Suisse economists expect the SNB to propose to the Swiss Federal Council that the capital buffer be increased and they anticipate that this measure is most likely to be announced in mid-February 2014.
High immigration rates may be a driver of economic growth in Switzerland but they also have the effect of ‘emotionalizing’ the debate about this issue, according to Credit Suisse AG. In their analysis, Credit Suisse economists reveal that the level of education of foreign workers in Switzerland has improved since the signing of the bilateral agreements with the EU, thus contributing to Swiss economic productivity and prosperity. They also show that – in contrast to a rigid quota system – the management of immigration and emigration based on supply and demand in the labor market is a more effective means of allowing the corrective impacts of the economic cycle to take effect, thus creating a natural buffer against unemployment. The sharp decline in immigration from Germany suggests that immigration will gradually slow overall as the economic situation in southern eurozone states improves.
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