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Economic survey by Credit Suisse in cooperation with the Centre for European Economic Research (ZEW)


Economic expectations remain dampened
Zurich.-The latest Financial Market Test Switzerland, carried out by Credit Suisse in cooperation with the Centre for European Economic Research (ZEW), continues to signal a weakening of economic momentum on a six-month horizon. Accordingly, the Credit Suisse ZEW indicator of economic expectations for Switzerland dipped slightly in June by 3.4 points to the -63.8 mark. Assessments of the current economic picture proved to be somewhat less optimistic, with the balance of indicators falling by 11.4 points to the 53.2 level. The largest proportion of survey participants (42.6%) still expects inflation rates to continue to climb further from their already high thresholds. Overall, however, inflation expectations decreased versus the previous month, and the relevant indicator dropped by 20.5 points to reach 17.0. On the other hand, the share of financial market experts who anticipate an increase in short-term interest rates grew to 55.3% in June. The corresponding balance of interest rate expectations surged by 40.6 points to the 48.9 mark in this month’s survey. The responses to the June “special question” revealed that 34% of the analysts forecast an increase in the three-month LIBOR target rate to 3%, while another 25% of respondents predict that the rate will hold steady at 2.75%.

The results of this month’s survey conducted in conjunction with the Financial Market Report Switzerland reveal that economic expectations worsened slightly again in the wake of an improvement in May. Roughly two-thirds of the financial market experts surveyed forecast a deteriorating economic picture on a six-month horizon. Merely 2.1% of the respondents expect the Swiss economy to brighten up. The Credit Suisse ZEW indicator for economic expectations thus declined overall by 3.4 points to the -63.8 mark. The majority of the experts continue to view the current economic situation in Switzerland as “good,” although the assessment was worse in this month’s survey compared with previous months. Nearly half of the participants (46.8%) regard the prevailing economic environment as “normal,” while none of the analysts describes the current situation as “bad.” The relevant balance of indicators dropped by 11.4 points to the 53.2 level.

The financial market experts assessed the danger of further climbing inflation rates in Switzerland as somewhat less severe in the June survey, whereby noteworthy is that inflation had already hit an extraordinary high point of 2.9% (YoY) in May. Most of the respondents (42.6%, down 11.6 percentage points versus the previous month) still believe that Swiss inflation rates will rise in the medium term. On the other hand, one-fourth of the participants predict that inflation will retreat. The corresponding indicator for the inflation rate decreased overall by 20.5 points to the 17.0 mark.

Regarding short-term interest rates, more than half of the analysts forecast an increase in this month’s survey, with the proportion of respondents rising by 32.4 percentage points month-on-month. Only 6.4% of the experts anticipate a decline in the current interest rate level, while 38.3% foresee no change in short-term rates. The relevant balance surged strongly overall by 40.6 points to the 48.9 threshold.

The majority of participants surveyed (51.1%) see stable long-term interest rates for the next six months, but 40.4% of the experts think long-term rates in Switzerland will trend upward.

Expectations on the part of the analysts regarding share prices diminished slightly versus the previous month, with most respondents still (56.5%) predicting that the Swiss Market Index (SMI) will gain terrain in the coming six months. However, one out of five financial market experts believes that share prices will lose ground. The corresponding balance therefore decreased marginally by 4.3 points to the 37.0 level. The majority of participants surveyed (47.8%) expect the Swiss franc/euro exchange rate to remain stable in the medium term. But a growing share of respondents (45.7%) anticipates that the Swiss currency will gain territory against the euro. Just 6.5% of the analysts think that the franc will follow a downward trend. The relevant balance increased noticeably by 12 points to reach 39.1.

The proportion of financial market experts who forecast declining oil prices rose considerably in this month’s survey, by 16.7 percentage points to 68.9%. Merely one out of ten analysts believes that oil prices will continue their ascent from the already very high peaks. Most of the respondents in the interim expect the price of gold to decline as well. At the same time, an increasing share of participants (41.9%) also foresees stable gold prices in the medium term. The corresponding balance plunged sharply by 34.7 points to the -30.2 level. The lion’s share (62.8%, up 4.1 percentage points) of the experts foresees a deterioration of the corporate earnings situation. Respondents also assess the trend in profit margins on a six-month horizon in a pessimistic light: 70.5% of the analysts expect the situation to worsen, while none of the specialists sees any chance for improvement in profit margins. The experts’ assessment of the Swiss labor market picture also turned out to be noticeably more negative compared with the previous month, with 63% of survey participants in the interim anticipating an increase in the unemployment rate. In contrast, not a single analyst expects the jobless rate to shrink.

Within the scope of the this month’s “special question,” the financial market experts were asked to convey their forecasts for Swiss GDP growth as well as their assessments of the effects of the credit crisis on the real economy. In addition, survey participants were questioned about their expectations regarding monetary conditions on a 12-month horizon. The responses show that 47% of respondents estimate GDP growth of between 1.5% and 2% for 2008, while 48% of the analysts forecast a three-month LIBOR target rate of 3% or more.

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.


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