Economy: Inflation concerns take center stage

After a strong first six months, the Swiss economy has lost some momentum recently. In particular, the summer’s high export volumes have returned to normal. Overall, however, the trend remains positive. Both industrial and service companies anticipate a pick-up in business activity over the coming months, which is reflected in strong incoming orders. Consumption among the Swiss public also remains stable. This is likely due to the fact that, while energy and fuel prices have risen significantly in Switzerland, inflation remains low at 1.0 percent and hasn’t yet spread to the wider economy. This means the Swiss National Bank (SNB) hasn’t been forced to tackle inflation with higher interest rates. However, it’s still likely to use the favourable environment over the coming months to break away from zero interest rates and normalize its monetary policy somewhat.

Growth, sentiment and trend

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After significant data revisions, the slowdown in growth over recent quarters has been put into perspective. The US economy didn’t underperform significantly in the first half of the year, but grew largely in line with its long-term trend, as indicated by the continued positive sentiment among companies. Yet, given high inflation of 3.7 percent, private household spending is growing faster than incomes, which is reflected in a historically low savings rate. In the construction industry, a further decline is also expected due to higher mortgage interest rates. The recent interest rate hike by the US Federal Reserve (Fed) has widened the gap between the policy rate and the inflation rate. While further interest rate adjustments can’t be ruled out, the pressure to take action is lower than for other central banks.

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The eurozone’s recovery is progressing gradually. Following the significant decline in spring, it’s encouraging that service companies are once again much more confident about their future prospects. However, growth impetus remains fragile, with consumers holding back for several months. This is likely due in part to the recent sharp rise in inflation. Another contributory factor is that the price of gas in the eurozone is having a relatively strong impact on electricity prices. Overall inflation stands at 3.8 percent. Although the core rate excluding energy and food is much lower at 2.5 percent, price pressure is likely to become more widespread, given persistently high energy prices. The European Central Bank (ECB), whose deposit rate stands at just 2.5 percent despite two rate hikes, would then probably be forced to make further interest rate moves.

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Economic performance in the major emerging markets remains characterized by regional differences. South Korea and Taiwan, which are benefiting from the boom in artificial intelligence thanks to their central role in chip production, are enjoying particularly strong growth. Growth also remains robust in India. In light of the recent improvement in sentiment, the slight dip in the summer months also seems to have been overcome. By contrast, China, the biggest emerging market economy by far, is hardly gaining any momentum. Investments are now more than 7 percent below the previous year’s level, and consumption is barely growing either. This means the structural recession is continuing. 

Growth, sentiment and trend

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