KOF Economic Forecast: Upturn Continues

Greater uncertainty about the development of the global economy

At the beginning of 2018, the expansion in global production slowed down considerably compared to 2017. One reason for this was that after global production reached a cyclical peak last year, the curve flattened out as anticipated. Another reason was the dampening of economic performance by exceptional effects, such as the negative growth in public consumption in Germany on account of the protracted negotiations to form a government. In this quarter, and over the quarters to come, these exceptional effects will disappear and global economic performance should increase again as a result. The tax reform in the United States may have stimulating effects here. However, the heights of 2017 will no longer be achieved, given the gradually increasing overutilisation in worldwide production capacities and an incrementally less expansive monetary policy. For the euro area, KOF predicts that economic performance will remain quite subdued in the second quarter of 2018. Oil prices continued their upward trend in the spring of 2018. A resulting increase in energy prices will probably drive up global inflation in the short term. Accordingly, KOF forecasts a rise in inflation to around 2% in the euro area over the coming months.

The simmering trade dispute between the United States and the EU is increasing economic uncertainty. Depending on how far it escalates, the conflict is likely to have negative effects on international trade and investment. Another forecasting uncertainty arises from the latest political developments in Italy. A recurrence of the euro crisis represents a significant downturn risk for the global economy, and above all the European economy.

Positive economic performance in Switzerland

Over the past year, Switzerland's economic performance has been considerable. Although some macroeconomic indicators – such as the KOF Economic Barometer – recently stagnated or declined, companies’ order books remain very healthy. Accordingly, it would appear that the economic upturn has not yet come to an end. Hence, KOF predicts GDP growth rates of 2.3% this year, although licencing revenues from sporting events distort the picture somewhat (see box). As the signs for the near future point to a slowdown in the rate of expansion, KOF forecasts GDP growth of 1.9% for 2019. After three years of stagnation, pro-capita growth is expected to be positive both this year (1.4%) and next (0.9%).

It is already over a year since the Swiss economy began to climb back from the slump that followed the appreciation of the franc. This resurgence in the competitiveness of Swiss companies and the improved economic situation in Europe has enabled export-oriented industries to expand in the past year. Meanwhile, the strengthening of the euro since mid-2017 has even permitted a growth in margins. Although industry appears to have stopped the period of contraction for now, the future of the construction industry appears somewhat less rosy. This sector has been doing well for years, but it will be very difficult to further increase activity from today's levels.

KOF expects the strongest drivers of economic performance to come from the service sector, particularly the insurance industry. Having been something of a problem child of the Swiss economy for the past few years, the hotel and catering sector has now returned to growth. KOF expects the sector to continue its positive development over the forecast period. Unless there is another appreciation of the Swiss franc, the lower rate of inflation in Switzerland compared to abroad will even boost price competitiveness.

Statistics overstate drop in unemployment

The labour market generally react delayed on the economic situation. The number of unemployed has been falling slowly since 2016, and this decrease has even accelerated recently. However, in the months from March to May of this year, the fall in the number of people registered as unemployed was overstated owing to changes in how these numbers are recorded. Growth in employment has accelerated, which is an indicator for businesses having greater confidence in the economic situation. According to International Labour Organization (ILO) figures, the unemploymen rate will be 4.5% this year and 4.3% next year.

Despite the improved situation in the labour market, growth in wages is sluggish. Last year, they increased in line with inflation, and we expect the same for this year. Only next year employees will participate in the productivity increase. The slightly elevated inflation level at present is being fuelled mainly by higher petroleum prices. Thus, there is no immediate need for a tightening of monetary policy. Accordingly, KOF predicts a continuation of low interest rates and even negative short-term interest rates.

Improved investment climate

Although investment spending has increased with the improved economic situation, we do not see any pronounced investment boom in our forecast. Over the past few years, and also this year, fluctuations in investments in equipment and machinery are dominated by investments in aircraft and rail vehicles in particular. These items are responsible for large fluctuations in quarterly growth rates. Based on current information, this effect is expected to diminish in the forecasting period.