UBS Economics-European Economic Perspectives _Switzerland quarterly All y...-110024946

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European Economic Perspectives

Switzerland quarterly: All you need to know

 !" #$"

In this third edition of our quarterly publication, we summarize our current views, key

charts and data to watch on the Swiss macro and policy outlook. The focus article dives

deeper into the SNB's balance sheet size and its implications for FX interventions.

%&''"(!)*+

After a strong Q2, helped by the cyclically insensitive pharma sector, the nascent

manufacturing recovery appears at risk as the Eurozone remains on a bumpy growth

path and a strong real CHF may turn into a headwind for exporters. There are signs that

the more domestic-oriented services sector is also decelerating, and unemployment has

ticked up. We forecast GDP growth of 1.3% in 2024 (including international sports

events) and expect growth to return to trend (1.5%) by next year, but we see risks for a

delay in the recovery. Inflation was stable at 1.3% y/y in July, below the SNB's Q3

forecast of 1.5%. We expect another small rent increase but see August inflation at only

1.2% and 2024 annual inflation at 1.3%. We have lowered our 2025 inflation forecast

by 20bp to 1.1%, given a likely decline in regulated electricity prices in January.

#$,- !"./(!)+

Following the second rate cut and dovish guidance in June, we expect one final 25bp cut

in September to a terminal rate of 1%, a level we consider broadly neutral. For the

outlook, we see two key questions: (1) Is there a reason for the SNB to ease policy into an

accommodative stance? (2) If the answer is yes, will this easing occur via another rate cut

or will the SNB resort to FX purchases to weaken the CHF? In our view, the current

inflation outlook does not warrant an expansionary stance. That said, renewed

CHF appreciation could tighten monetary conditions – in particular as ECB rate cuts will

narrow the rate differential – and growth remains subdued, hence we see a risk for the

policy rate to be cut below neutral later this year or in 2025. We also think the hurdles

for SNB FX intervention would not be particularly high in case of meaningful CHF

appreciation in an environment of risk-off. Thomas Jordan will chair his last meeting in

September and be succeeded by Martin Schlegel. The recent lowering of the tiering

threshold does not have immediate implications for monetary policy setting, in our view.

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In our focus article, we take a closer look at four factors that might constrain the SNB in

expanding its balance sheet again: (1) interaction with government finances and

potential negative fiscal impact; (2) pressure to use the balance sheet for other purposes;

(3) the "currency manipulator" label by the US Treasury; and (4) the SNB's footprint in

financial markets. We argue that none of the factors is likely to effectively constrain the

SNB and that the use of FX interventions is rather a function of monetary conditions and

policy space. That said, we differentiate between the systematic and large-scale balance

sheet expansion that characterised the pre-2022 period when the policy rate was at the

lower bound, and discretionary and temporary FX interventions in periods of sharp

CHF appreciation. While the policy rate has been the preferred tool for easing so far, we

think discretionary FX purchases could play a role once the policy rate reaches neutral.

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We like to tactically pay SARON 1y1y if levels drop below 55bp. We also continue to see

value in cross-market trades involving either ESTR or SONIA 1y1y rates against SARON

because of the expectations that policy rates between the ECB/BoE and the SNB will

converge over time. In FX, we think the rebound of popular carry crosses following the

risk-off episode in early August is likely to be more tactical as elevated volatility makes FX

carry strategies less appealing. Our year-end forecast for EURCHF is 0.94.

This report has been prepared by UBS Europe SE. #7 8 48909489# #1 :;91 19 4 ; ' <=>?@A<=B

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Europe Ex. UK

0R5

Economist

felix.huefner@ubs.com

+49-69-1369 8280

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Economist

franziska.fischer@ubs.com

+41-44-239 2054

4

Economist

reinhard.cluse@ubs.com

+44-20-7568 6722

8

Economist

anna.titareva@ubs.com

+44-20-7568 5083

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Strategist

yvan.berthoux@ubs.com

+44-20-7901 5513

""S"

Strategist

emmanouil.karimalis@ubs.com

+44-20-7567 8000

!"T! 27 August 2024 ab 2

European Economic Perspectives UBS Research

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% y/y, unless otherwise stated 2023 2024F 2025F Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

Real GDP, % q/q - - - 0.3 -0.3 0.3 0.3 0.5 0.4 0.4 0.2 0.4 0.4 0.4 0.4

Real GDP 0.7 1.3 1.5 1.6 0.4 0.4 0.7 0.8 1.5 1.6 1.5 1.4 1.4 1.4 1.6

Private consumption 2.1 1.3 1.4 3.1 2.2 1.7 1.2 1.1 1.2 1.3 1.5 1.5 1.4 1.3 1.2

Government consumption -2.0 0.6 1.2 -1.8 -2.0 -2.0 -2.0 -0.4 0.4 0.7 1.0 1.2 1.2 1.2 1.2

Fixed investment -1.4 0.4 2.0 1.5 -1.9 -2.4 -2.7 -3.2 1.0 1.4 1.7 2.0 2.0 2.0 2.0

Exports of gds & services 2.0 1.3 2.8 -1.0 6.6 0.5 2.5 2.2 1.2 1.8 2.4 2.7 2.8 2.8 2.8

Imports of gds & services 4.5 1.1 3.2 8.4 4.5 1.6 3.8 -2.4 1.8 2.3 2.9 3.2 3.2 3.2 3.2

Stocks* -0.9 -0.2 0.0 4.2 -1.7 0.8 1.2 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Domestic demand 1.6 2.2 1.4 7.2 -1.5 1.0 1.0 0.6 2.4 3.3 4.1 1.6 1.6 1.6 1.6

Net exports* 0.6 0.3 0.2 -4.4 1.7 0.7 0.2 1.2 -0.1 0.0 0.1 0.2 0.3 0.3 0.3

Nominal GDP 2.9 2.6 2.5 4.7 2.5 2.0 2.3 2.0 2.8 2.8 2.8 2.5 2.4 2.5 2.7

Industrial production 0.9 -1.0 0.4 4.5 -0.9 1.2 -1.2 -4.9 0.3 0.4 0.4 0.4 0.4 0.4 0.4

Employment (FTE) 2.0 1.0 0.8 2.4 2.2 1.7 1.7 1.4 0.9 0.9 0.8 0.8 0.8 0.8 0.7

Unemployment rate (%) 2.0 2.4 2.6 1.9 2.0 2.1 2.1 2.2 2.4 2.5 2.6 2.6 2.7 2.6 2.5

CPI 2.1 1.3 1.1 3.2 2.1 1.6 1.6 1.2 1.4 1.2 1.3 1.1 1.0 1.1 1.1

Current account (% of GDP) 7.6 8.2 7.6 ------------

Budget balance (% of GDP) 0.1 0.5 0.2 ------------

Government debt (% of GDP) 39.9 38.3 37.2 ------------

SNB target rate (%, yr-end) 1.75 1.00 1.00 1.50 1.75 1.75 1.75 1.50 1.25 1.00 1.00 1.00 1.00 1.00 1.00

2025F

2023

2024F

Source: Haver, UBS. * Percentage-point contribution to growth. As of 26 August 2024. Excluding Q2 Flash GDP because of the yet to be published general revision of

national accounts and full Q2 GDP breakdown, and because Flash GDP is in sports event-adjusted terms while our forecast is not sports event-adjusted.

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Variable Data point Release date Release time (CET) Source

KOF leading indicator August 30/08/2024 9.00h KOF

SNB balance sheet data July 30/08/2024 9.00h SNB

PMI August 02/09/2024 9.30h UBS, procure.ch

Quarterly GDP Q2 2024 03/09/2024 9.00h SECO

CPI August 03/09/2024 8.30h FSO

Unemployment August 05/09/2024 7.45h SECO

Consumer confidence August 06/09/2024 9.00h SECO

SNB FX reserves August 06/09/2024 9.00h SNB

PPI August 16/09/2024 8.30h FSO

External trade August 19/09/2024 8.00h FOCBS

Balance of payments Q2 2024 20/09/2024 9.00h SNB

Referendum 22/09/2024 all day Federal Chancellery

Banking statistics July 23/09/2024 9.00h SNB

SNB monetary policy decision 26/09/2024 9.30h SNB

KOF leading indicator September 30/09/2024 9.00h KOF

SNB balance sheet data August 30/09/2024 9.00h SNB

PMI September 01/10/2024 9.30h UBS, procure.ch

CPI September 03/10/2024 8.30h FSO

Unemployment September 04/10/2024 7.45h SECO

SNB FX reserves September 07/10/2024 9.00h SNB

Consumer confidence September 11/10/2024 9.00h SECO

PPI September 14/10/2024 8.30h FSO

External trade September 17/10/2024 8.00h FOCBS

Banking statistics August 21/10/2024 9.00h SNB

KOF leading indicator October 30/10/2024 9.00h KOF

SNB balance sheet data September 31/10/2024 9.00h SNB

PMI October 01/11/2024 9.30h UBS, procure.ch

CPI October 01/11/2024 8.30h FSO

Unemployment October 05/11/2024 7.45h SECO

SNB FX reserves October 07/11/2024 9.00h SNB

Source: National sources, UBS

!"T! 27 August 2024 ab 3

European Economic Perspectives UBS Research

"



After an upside surprise in Q2 flash GDP, likely helped by the pharma sector, leading

indicators point to a loss of momentum at the beginning of Q3. The manufacturing PMI

lost ground again in July, standing below the growth threshold for the 19th consecutive

month. While there was a tepid upward trend from the summer 2023 lows, the

manufacturing recovery is uneven and slow. Moreover, the real effective exchange rate

remains at high levels and could be a headwind.

Over the past 1.5 years, aggregate growth has held up relatively well despite profound

manufacturing weakness, thanks to robust services activity. Strong immigration has also

been a tailwind for private consumption and domestic demand. However, in recent

months, the Services PMI has started to trend lower and unemployment higher.

Our baseline forecast is for Swiss growth to gradually return to trend over the coming

quarters, but we see the risk for a delay. Manufacturing remains vulnerable to setbacks

in the Eurozone recovery and CHF appreciation, while services could decelerate further.

We project annual GDP growth of 1.3% in 2024, including a positive impact from

international sports events.

Key to watch: annual GDP revision (27August), August KOF index (30 August), August

PMIs (2 September), Q2 2024 GDP (3 September)

"

The Swiss labour market is relatively flexible so that we are more worried about

employment risks in Switzerland than in the Eurozone. Labour data has indeed shown

signs of softening as 1.5 years of manufacturing weakness impact labour demand.

Employment growth is negative in many manufacturing sectors, and the use of short-

time work is above the levels of the Eurozone crisis and the 2015 CHF shock. The

unemployment rate has also risen visibly, from 1.9% in early 2023 to 2.5% in July 2024.

Employment growth is positive at 1.3% y/y (albeit below the long-term trend) because

work-related immigration increases the labour force and labour demand from services is

compensating for manufacturing weakness. With the Services PMI employment

component falling into contraction in two out of the past four months, the latter

support might fade somewhat over the next few quarters. We therefore expect the

unemployment rate to increase slightly further to 2.6% by the end of this year. This

would be a moderate rise of around 0.7pp from trough to peak − compared with a sharp

deterioration during past recessions when unemployment rose by 1.2-1.7pp.

Key to watch: August labour market data (released 5 September)

9

Swiss inflation remained stable at 1.3% y/y in July, in line with expectations and well

within the SNB's target range of "below 2%". Inflation at the start of Q3 is lower than

the SNB's conditional inflation forecast from June, which foresees a pick-up from 1.4%

in Q2 to 1.5% on average in Q3.

Domestic price changes (currently at 2% y/y) are the sole driver of inflation, in particular

after the majority of rent increases (the largest CPI component) has now passed

through. Imported inflation is negative at -1.0% y/y.

We expect inflation to decline to 1.2% in August, despite another small rent increase,

but we see upside risks from changes in several regulated components (education, social

protection). Overall, we foresee a bumpy and volatile monthly inflation profile in H2 and

average annual inflation of 1.3% in 2024. We have revised down our 2025 forecast by

20bp to 1.1% on the back of a likely decline in regulated electricity prices in January. The

SNB projects 1.3% in 2024 and 1.1% in 2025.

Key to watch: August inflation (released 3 September) − we expect 1.2% y/y

0*& 

1T

-5

-3

Jan-19 Oct-19 Jul-20 Apr-21 Jan-22 Oct-22 Jul-23 Apr-24

Manufacturing PMI Services PMI

KOF leading indicator SECO index weekly activity

index, standardized

Source: Haver, procure.ch, KOF, SECO, UBS

0 & ;"!"  

'-

Source: Haver, SECO, UBS

0 Q& 1"  

'-U

-2%

-1%

2016 2017 2018 2019 2020 2021 2022 2023 2024

Imported: petro products Imported: other

Domestic: other Domestic: rents

Headline inflation

Source: Haver, UBS

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abEuropeanEconomicPerspectivesSwitzerlandquarterly:Allyouneedtoknow!"#$"Inthisthirdeditionofourquarterlypublication,wesummarizeourcurrentviews,keychartsanddatatowatchontheSwissmacroandpolicyoutlook.Thefocusarticle...

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