UBS predicts strong economic growth

UBS said equipment spending should increase sharply RDB

UBS has raised its 2007 growth forecast for the Swiss economy to 2.6 per cent from 1.8 per cent, citing strong and broad-based business activity.

Last week the Swiss National Bank also upped its forecast for 2007 and announced an interest rate increase. Other leading indicators, including BAK Basel Economics and the Swiss Economic Institute (KOF), have similarly raised their outlooks.

UBS – Switzerland’s largest bank – also announced on Wednesday that it saw growth for 2008 of 2.3 per cent compared with its previous forecast of 2.0 per cent.

“Economic activity is not only robust but also broadly based, which inspires confidence. Most economic indicators point to sustained positive momentum,” the bank said in a statement.

“Foreign trade is also expected to have a positive impact due to sustained economic growth and the improved competitiveness of the Swiss economy following the weakening of the Swiss franc.”

The franc is at an eight-and-a-half-year low against the euro, pushed down by a low short-term benchmark interest rate of 2.5 per cent. Investors are borrowing the Swiss currency to invest in higher-yielding assets.

UBS said the Swiss economy grew by 2.7 per cent in 2006 and it continued its surge in the first three months of 2007.

Real GDP (gross domestic product), when extrapolated for the full year, grew by 3.2 per cent. This was the sharpest rise since the third quarter of 2005 and was well above the long-term average.

Recovery in the labour market was in full swing and should continue to lift consumer sentiment in the coming months, according to UBS. The resulting rise in employment and the expected increases in real wages were having a positive impact on disposable household income.

Industrial growth

UBS added that equipment spending should increase sharply over the next few quarters, given healthy orders and profits.

It said it was therefore confident that private consumption would continue to support the economy.

On Monday the Federal Statistics Office reported that Swiss industrial production excluding the construction sector grew by 7.3 per cent compared with the first quarter of 2006.

Growth was seen in almost all sectors, it said, especially mining, vehicle manufacturing, the leather industry, electronics and the timber industry.

Inflation

UBS added on Wednesday that the medium-term prospects for low inflation rates remained intact, despite the strong economic momentum and the weakness of the franc versus the euro.

This expectation was supported by structural factors such as intensifying competition in the Swiss domestic market and the further opening of the labour market to EU citizens.

Overall, the bank expected consumer prices to rise by 0.4 per cent in 2007 and 0.8 per cent in 2008.

Given the strong domestic growth, UBS said the Swiss National Bank should continue to pursue its policy of gradually normalising monetary policy.

Positive trend

UBS’s positive outlook is in line with other economic organisations.

At the beginning of this month BAK raised its outlook for 2007 from 2.1 per cent to 2.5 per cent.

In April KOF raised growth forecasts believing the Swiss economy would continue to thrive.

“We are growing above potential and will stay above potential, so we’re in a phase of economic boom,” said KOF head Jan-Egbert Sturm. “It’s a very rosy situation and it’s good news.”

Last Thursday the Swiss National Bank raised its key interest rate by 0.25 per cent to 2.5 per cent for the seventh quarter running, in a move that had been widely expected by the markets.

The bank said that Switzerland’s economy was “in excellent shape”.

swissinfo with agencies

Key facts

Growth forecasts for the Swiss economy in 2007:
Swiss National Bank (SNB): 2.5%
BAK Basel Economics: 2.5%
KOF Swiss Economic Institute: 2.4%
State Secretariat for Economic Affairs (Seco): 2%