Credit Suisse publishes its “Monitor Switzerland” for Q4 2018
The Swiss economy is set to grow by 1.7% in 2019, and therefore at a slower rate than in 2018, according to Credit Suisse forecasts. Private consumption will be the main growth driver, while the contributions from foreign trade and investment growth are expected to weaken. In the latest issue of “Monitor Switzerland,” published today, the Credit Suisse economists also show that Switzerland’s high level of prices primarily reflects the country’s prosperity, and is only partly the result of market protection. Experience from the EU single market also suggests that a broader opening up of the Swiss market would not trigger a widespread collapse in Swiss price levels.
Export growth in Switzerland is likely to weaken further in 2019, according to the economists at Credit Suisse. Given the more sluggish export momentum, growth in capital spending on machinery and equipment is also likely to slow. Credit Suisse’s economists also expect lower growth in construction investment next year, because oversupply in the rental apartments market is increasing and order books are gradually thinning. In contrast, growth in private consumption is actually likely to accelerate somewhat. Immigration has stabilized at a lower level, and therefore we do not expect any additional impetus from what has been the biggest growth driver to date.
However, the improved situation on the labor market in general and the falling unemployment rate in particular are likely to be positive for consumer sentiment and thus contribute to robust growth in private consumption. Even so, the acceleration in consumer growth will not be enough to offset the slowdown in the other demand components. The bottom line is that the economists forecast overall GDP growth of 1.7% for 2019, following 2.7% in 2018. Swiss prices are set to rise at a modest rate in 2019 (Credit Suisse forecast: 0.7%), although domestically oriented services in particular are likely to become more expensive.
Prosperity and protection from competition are key reasons for Swiss price levels
Switzerland currently has the second-highest price level in Europe – only the remote island nation of Iceland is even more expensive. Part of Switzerland’s high price level is simply the flipside of a high standard of living, since according to the economists at Credit Suisse there is a significant connection between a country’s economic output and its price level. This theoretically logical connection – in rich, high-wage countries, local service providers such as physicians or teachers must still receive a competitive wage, which results in a generally higher price level – accounts for much of the difference in price levels across Europe. However, a sizeable element of the difference in price levels remains unexplained. The higher Swiss prices for products that are actually easily tradable – such as meat and food in general – are (partly) due to political protection from competition, according to the Credit Suisse economists.
Price convergence in EU is mainly due to economic factors
The latest “Monitor Switzerland” analyzes how market deregulation impacts on the level of prices based on price developments in the EU single market. As would be expected in a domestic market, price levels among the individual countries of the EU have drawn closer together over the last two decades. In addition to the market opening, however, the general economic homogenization of the countries has also contributed to price level convergence, according to the economists at Credit Suisse. Price levels have tended to rise most in the countries that joined the single market as part of the eastern EU expansion – precisely the countries that started from a typically lower level of both wealth and prices. According to Credit Suisse estimates, the two factors of economic growth and exchange-rate trends alone account for more than half of the differences in price levels in EU countries. The fact that price convergence is less pronounced between countries that are more similar also suggests that the EU single market does not have a major direct effect on price levels.
To gain an impression of the possible effects of a greater opening up of the Swiss market to the EU single market on the price level in Switzerland, the economists showed a detailed comparison of price developments in Switzerland with those in the geographically and economically similar euro countries of Germany, Austria, and the Netherlands. Even after adjusting for the exchange-rate effect and considering the different economic developments, the analyses indicate that, compared with Switzerland, the rise in the price level since 1999 was nine percentage points lower in Germany and three percentage points lower in Austria. This suggests a certain deceleration in the price trend thanks to the EU domestic market. However, the fact that the similarly adjusted price level in the Netherlands rose 1.5 percentage points more than in Switzerland appears to contradict this hypothesis. “A broader opening of the Swiss market to the EU domestic market would have a fundamentally positive effect for consumers, but would not trigger a massive price slide,” concludes Oliver Adler, Chief Economist Switzerland at Credit Suisse.