Investment Solutions & Products Swiss Economics Interest rates remain negative for the time being Monitor Switzerland | Fourth quarter 2019 Swiss Economy Focus Monetary policy GDP growth only moderate Negative interest rates are effective Larger profit distribution? in 2020 too Page 6 Page 10 Page 18 Impressum Publisher, Credit Suisse AG, Investment Solutions & Products Nannette Hechler-Fayd'herbe Head of Global Economics & Research +41 44 333 17 06 nannette.hechler-fayd'[email protected] Oliver Adler Chief Economist Switzerland +41 44 333 09 61 [email protected] Authors Oliver Adler Maxime Botteron Sara Carnazzi Weber Emilie Gachet Tiziana Hunziker Alexander Lohse Claude Maurer Thomas Rieder Fabian Waltert Orders Direct from your client advisor or from any Credit Suisse branch. Contribution Vojo Gunevski Ewelina Krankowska-Kedziora Editorial deadline 5 December 2019 Copyright © The publication may be quoted providing the source is indicated. Copyright © 2019 Credit Suisse Group AG and/or affiliated companies. All rights reserved. Swiss Economics I Fourth quarter 2019 2 Editorial Dear Reader On January 15, 2015 – or almost exactly five years ago – the Swiss National Bank (SNB) an- nounced that it would be cutting its key interest rate to well below zero. If someone had been bold enough to predict five years earlier that interest rates in Switzerland would ever reach such a low level, he or she would probably have been dismissed as being rather light in the head. Yet today the yields on Swiss government bonds are in negative territory up to terms of well beyond 30 years, while interest rates are also negative in numerous other European countries. The focus article of this edition of Monitor Switzerland takes a detailed look at the causes and re- percussions of negative interest rates, not least because this issue continues to be hotly debated in the press and public domain generally. The SNB’s influence – i.e. its room for maneuver when determining the level of interest rates – is much more limited than is often assumed. First, the trend of declining interest rates is a global phenomenon that has persisted for decades and also encompasses the Swiss market. This trend is attributable on the one hand to the decline in infla- tion – and in this sense to a restrictive central bank policy that focuses on monetary stability – and on the other to the decline in real interest rates. The latter are a consequence of (among other things) demographic aging, lower productivity growth, a high savings rate (partly for cyclical rea- sons), and a fairly low level of investment demand. Even the “big” central banks such as the Fed- eral Reserve and the European Central Bank can only influence this real component of interest rates in a temporary way. Second, the SNB is confronted with the so-called monetary policy “trilemma”: It essentially has a choice between managing key interest rates and managing the exchange rate – unless it chooses the third option of interfering with capital flows between Switzerland and the outside world. How- ever, this latter measure would do enormous damage to the Swiss economy and financial center. As things stand, it seems premature to assume that the SNB will simply let the exchange rate “do its thing.”. Given the still fragile global and European economy, the risk of such a laissez-faire ap- proach to a significant proportion of our export sector would be too great. Furthermore, even in such a scenario it is unlikely that long-term interest rates would rise and thus (for example) im- prove the investment income outlook for Swiss pension funds. This makes it all the more important to tackle, swiftly and consistently, the structural problems – particularly in the Swiss pension system – that have been exacerbated by low interest rates. This is an area in which the SNB is powerless to help. We thank you for your interest, look forward to your feedback, and wish you all the best for the New Year. Michael Strobaek Oliver Adler Global Chief Investment Officer Chief Economist Switzerland Swiss Economics I Fourth quarter 2019 3 Contents Page Global environment 5 Swiss Economy 6 GDP growth only moderate in 2020 too Although economic output is likely to be higher in 2020 (1.4%) than in 2019 (0.9%), this acceleration will be exaggerated by various major sporting events. Nonetheless, the manufacturing sector should stabilize. Economy Monitor 7 Sectors I Monitor 8 Focus – negative interest rates 10 Interest rates remain negative for the time being Negative interest rates in Switzerland are a consequence of global developments. There are no clear signs to suggest that the monetary policy of the Swiss National Bank (SNB) is too expansionary. The SNB is very likely to continue to seek to prevent a stronger appreciation of the Swiss franc with negative interest rates and sporadic currency market interventions as long as the economy of Switzerland’s most important trading partners does not improve materially. Focus – negative interest rates 15 Monetary policy 18 Larger profit distribution? We estimate that the foreign currency reserves of the Swiss National Bank (SNB) will yield CHF 18–20 bn per annum (p.a.) over the next 5 years, while the expected loss in a worst- case scenario would reach CHF 75 bn. Nevertheless, an increase of the annual distribution to the cantons and the Confederation could be considered, in our view. Monetary policy I Monitor 19 Real Estate I Monitor 20 Credit Suisse Leading Indicators 21 Forecasts and Indicators 23 Swiss Economics I Fourth quarter 2019 4 Global environment Europe European households exhibit optimism EK consumer confidence indicator Europe has suffered disproportionately from the recent 0 weakness in global manufacturing, with home-made crises – such as the problems of the automotive industry and the -5 repercussions of Brexit – weighing additionally on economic growth. The improvement that we expect to see should -10 therefore have a clear positive effect. Furthermore, the out- look for consumer spending remains good, as European -15 households are in a buying mood thanks to low unemploy- ment and rising real incomes. Furthermore, the expansionary monetary policy of the European Central Bank (ECB) is -20 having a supportive effect, and even countries like Germany are considering an increase in government spending. -25 2000 2004 2008 2012 2016 [email protected] Source: Datastream, Credit Suisse USA Small US companies remain optimistic US NFIB small business optimism index It is clear that the Sino-US trade dispute is weighing on 110 global trade, as the sharpest declines in global industrial production have been recorded in the direct aftermath of 105 tariff increases being implemented. However, this conflict does not appear to be having any real negative impact on 100 the sentiment of US companies, as the US small business 95 optimism index remains well above its long-term average. The US economy’s relatively strong resilience is buoyed by 90 the more expansionary monetary policy being pursued by the Federal Reserve. That said, the Fed is now likely to pause 85 for a while after having cut key interest rates three times in 2019. 80 2000 2004 2008 2012 2016 [email protected] Source: Datastream, Credit Suisse China Fewer car sales in China Year-on-year change in automotive sales in China, moving three-month average, in % China’s economic growth is likely to weaken slightly again in 120 2020. However, the slowdown is likely to be attributable to 100 more than just the trade dispute with the US – consumer spending in China itself is also weakening. For example, car 80 sales in China have been declining for the last 12 months or so. To prevent the economy from weakening too severely, 60 the central bank and the government are likely to adopt 40 counteractive measures in the form of credit stimuli and quantitative easing. 20 [email protected] 0 -20 2006 2008 2010 2012 2014 2016 2018 Source: Datastream, Credit Suisse Swiss Economics I Fourth quarter 2019 5 Swiss Economy GDP growth only moderate in 2020 too Although economic output is likely to be higher in 2020 (1.4%) than in 2019 (0.9%), this acceleration will be exaggerated by various major sporting events. Nonetheless, the manufacturing sector should stabilize. Growth in the third Swiss economic growth recorded a quarter-on-quarter rise of 0.4% in the third quarter of 2019, a quarter thanks to two surprisingly strong increase. However, this growth relates almost exclusively to the booming phar- sectors ma industry and record-high electricity exports, the latter being attributable to full reservoirs follow- ing a winter characterized by heavy snowfall. Excluding these two areas, the Swiss economy rec- orded only weak growth, while the capital goods industry actually recorded a decline. Against this backdrop, we are reducing our forecast for growth in gross domestic product (GDP) in 2019 to 0.9% (from 1.1%). Manufacturing set to For 2020 we are forecasting GDP growth of 1.4%. The situation in the capital goods industry stabilize in 2020; should stabilize. The purchasing managers index (PMI) that we produce for the Swiss manufactur- consumer spending ing sector together with procure.ch is only just below the growth threshold, and there are signs of to remain supportive a stabilization of foreign demand (cf. page 5). At the same time, Swiss economic growth will con- tinue to be buoyed by consumer spending. Households remain in a spending mood, particularly as fears over job security have barely increased – and rightly so, as the labor market situation remains comparatively robust (see Fig.). Construction investment is likely to enjoy an acceleration in growth in 2020 following a brief phase of weakness in the construction economy this year.