Switzerland managed to adjust to the exchange rate shock two years ago and is growing again. Unemployment rates are falling such that consumer confidence is increasing again, bolstering private consumption.
Domestic and imported consumer prices are back in positive territory. However, it will take more time that reflation is in a range at which the Swiss National Bank (SNB) could tighten monetary policy again. We expect policy rates to remain constant until at least end-2018.
Switzerland is back. More than two years after the SNB ceased to defend the exchange rate floor in mid-January 2015, the economy managed a solid rebound. The overall price level is still 1.1 percent lower than prior to the SNB decision due to the price decline of imports of 4.1 percent.
Still, the country managed to escape deflationary spirals as domestic and core inflation remained more or less stable throughout the adjusted period thanks to increasing prices for services.
While inflation rates are pointing in the right direction, in our view, it will take until 2019 to bring consumer prices back in the range of 1 percent. Margins in the producing sector are still under pressure: Domestically produced manufactured goods still show inflation rates of -0.5 percent year on year for domestic customers and -1.3 percent year on year for foreign clients.
Business sentiment is clearly improving. In June, the manufacturing PMI increased to its highest level since March 2011 on the back of higher production, orders and employment components. Other labor market indicators are pointing in the same direction.
Unfilled vacancies are at a higher level than end-2014 again while the number of unemployed people has been declining in seasonally adjusted terms every single month since September 2016.
In January 2018, the unemployment rate will reach its level of January 2015, if the number of unemployed falls at the same pace that could be observed in the past three months. Falling unemployment did boost consumer confidence already and we expect this trend to continue in the coming quarters.
As a result, we expect domestic consumption to grow more strongly than it did in the past. With a stronger euro area economy, the perspective for stronger exports is improving again. However, it will be difficult for Switzerland to grow more strongly than the euro area itself as it did in the 11 years prior to the exchange rate adjustment when it benefited additionally from strong immigration, rising real estate prices and a booming construction sector.
A more stable economic and political situation in the euro area also implies that the SNB is likely to be forced to intervene in the foreign exchange market in the second half of 2017 less than they did in the past. However, we do not see any scope to loosen monetary policy or to increase rates before 2019.
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