ZEW-CS Financial Market Test Switzerland - Positive Assessment Prevails, but Medium-term Growth Outlook Less Optimistic

The Financial Market Test Switzerland carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse (CS) in August confirms the overall positive sentiment that has prevailed since the survey was launched in June of this year. The financial market experts give an even more favourable assessment of the current economic situation in Switzerland than they did in July. The corresponding indicator now stands at 90.2 points.

Regarding the assessment of the future prospects for the Swiss economy, however, the sentiment deteriorated and the indicator fell to 16.3 points. Fewer participants believe that inflation and interest rates will rise, but a higher percentage believes the Swiss franc will appreciate vs. the euro. Fewer participants are optimistic about equity market developments.

The outlook for economic development in the next six months remains positive, although the relevant indicator has declined since July. A further improvement in the economy is expected by 27.8 percent of the surveyed, whereas 60.7 percent of the participants anticipate no change, and 11.5 percent expect the situation to worsen. The balance of the positive and negative assessments for this indicator therefore lies at 16.3 points, quite a significant drop of 8.2 points compared to the previous month. This assessment could be interpreted as a sign that the pace of the economic upward trend will remain strong but might slow moderately over the forecast period.

Price pressures in Switzerland are still assessed to be low although the inflation rate rose in the first half of this year, driven mainly by higher energy prices. Structural impacts are evident, stemming, for instance, from increased competition or changes in legislation and have disinflationary effects. However, a clear majority of the respondents anticipates a further increase during the next six months. In this month's special question, the participants were also asked to explicitly assess the inflation rate development in Switzerland for the whole of 2006. On average, they foresee a moderate increase in prices of 1.55 percent. This continues to be well in line with the Swiss National Bank's (SNB) definition of price stability.

A pronounced shift has occurred concerning the estimated exchange rate development of the CHF vs. the EUR. Compared to the previous months, a significantly higher percentage of survey participants (39.4 percent) expect the Swiss franc to strengthen after it has weakened to a level of around 1.58 vs. the EUR. Only 4.9 percent of the survey participants expect a depreciation to occur, bringing the indicator to 34.5 points, an increase of 16.7 points in comparison with the July figure. While the Swiss franc might have lost some of its appeal as a "safe haven" currency, especially after the introduction of the EUR, the question remains as to how the SNB would react to a further depreciation, since this implies potentially more inflationary pressure, especially for an economy growing at the solid pace we are witnessing in Switzerland.

The survey participants forecast interest rates to rise further - both at the short and the long end of the yield curve. However, in the medium run, they are less convinced than in the previous month that rate hikes by the SNB will continue. Respondents gave on average a much less positive outlook on the major equity markets compared to the previous month. The SMI is expected to develop accordingly, with 56.6 percent of the participants expecting the SMI to rise further and 21.7 percent expecting a decrease. The corresponding indicator fell to 34.9 points.

The Survey Process and Methodology

The ZEW has conducted a similar monthly survey for Germany since 1991. The aim of the Swiss survey is to develop indicators both for Switzerland's general economic climate as well as for the Swiss services sector.

Specifically, survey participants are asked to give their medium-term expectations for important international financial markets as regards the development of the economy, the inflation rate, short- and longer-term interest rates, equity prices and exchange rates. In addition, the financial experts are also asked to assess the earnings situation of companies in the following Swiss services sectors: banks, insurance, consumer/retail, telecoms, and services as a whole.

The results represent the net difference between the percentage of positive and negative responses. Figures in parentheses show the changes for each indicator compared to the previous month.

The detailed results can be obtained from the "Switzerland Financial Market Report", which is published on a monthly basis.

Contact

Prof. Dr. Michael Schröder (ZEW), Phone: +497621/1235-140, E-mail: schroeder@zew.de  

Thomas Herrmann (CS), Phone: +41/44/333-5062, E-mail: thomas.herrmann@credit-suisse.com