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| February 24, 2003 | Monday | Zul Hijjah 22, 1423 |
World economic report
Switzerland, a country of only 7 million people, employs nearly 220,000 people in financial services, of which more than half work in banking, according to the Swiss finance ministry. The sector also employs 180,000 staff outside Switzerland, with more than half working for the UBS and Credit Suisse, the two banks that dominate the Swiss financial landscape. The country is the number one centre for wealthy individuals who like to do their private banking “offshore” and out of sight of their domestic tax authorities.
The Swiss franc is one of the world’s great safe-haven currencies and is the fifth most traded currency after the dollar, euro, yen and sterling. Switzerland has the world’s fifth biggest bond market and accounts for more than one-quarter of all the money flowing into the global hedge fund industry. In terms of managed investment funds, Switzerland ranks as the 10th most important centre worldwide. It still has the world’s biggest cluster of private bankers, led by Geneva’s Pictet, whose partners shoulder unlimited liability for their firms’ losses — a powerful self-discipline in current uncertain times.
Switzerland remains a strong and well-regulated financial centre, lying at the heart of Europe. But it has one big potential weakness. Its extremely successful business of managing the fortunes of wealthy individuals has been built, in part, on money that has not been declared to the tax authorities of Switzerland’s European neighbours. As a result, it faces increasing international pressures to lift its legendary bank secrecy laws, one of the country’s main competitive advantages.
Economic stagnation in the euro-zone, especially in Germany, which is Switzerland’s biggest single customer, has killed hopes, for the time being at least, of an export-led recovery. Consumer spending, the main economic prop in 2001, has run out of steam and company investment has collapsed, depressed by weakening demand. The upturn is not foreseen until the second half of this year, giving an annual growth rate of perhaps between 0.5 and 1.0 per cent. Not until 2004 is the Swiss economy expected to be expanding in line with its long-term potential of between 2.0 and 2.5 per cent annually. The recovery is predicted to be export-driven, which means it will depend crucially on a broader European and world recovery to boost demand, especially for the high-end capital goods in which Switzerland specializes.
The Swiss franc remains uncomfortably high against the euro, the currency of Switzerland’s main export markets, and has strengthened considerably against the dollar during the past year. Repeated interest rate cuts totalling 2.75 percentage points by the Swiss National bank (SNB), the independent central bank, during the past two-and-a-half years have failed to keep the lid on the exchange rate, now hovering under SFr1.47 to the euro. The franc’s safe-haven status is also underpinned by Switzerland’s low inflation rate of less than 1 per cent and its vast current account surplus SFr34 billion last year or 8 per cent of the GDP. Despite the handicap presented by the strong franc; forecasters expect exports to start picking up more strongly with domestic spending following rather than leading recovery.
Public spending is constrained by government efforts to maintain budget balance, while private spending is being held back by waning consumer confidence, maintain because of worries over job security. Although unemployment, at below 3 per cent, is still at levels that the neighbours can only envy, it has been rising since the end of last year and more job losses are in the pipeline as a result of cutbacks by some of Switzerland’s biggest companies.
Unemployment will remain a significant drag on Swiss domestic demand in the years ahead. And expect the unemployment rate to average about 3.5 per cent next year, compared with 2.8 per cent in 2002 and 1.9 per cent last year. Rising unemployment reflects a flexible labour market and believes the jobless rate will fall back quickly once growth picks up. The increase in unemployment is a sign of health.
The economy — the biggest in the euro-zone and third largest in the world — is seriously out of sorts. Growth is minimal and Germany is on the edge of recession for the second time in 12 months. In the European Union, Germany’s reputation as a pillar of fiscal discipline has been badly hit by its own soaring budget deficit. The government expects gross domestic product to rise 1.5 per cent in 2003. Its independent council of economic advisers finds that optimistic, forecasting growth of 1 per cent for 2003.
The slowdown has had dramatic consequences. Higher than expected unemployment — forecast to average 4.17 million in 2003 — has increased the burdens on the state jobs insurance scheme and prompted additional government subsidies. Greater numbers than projected out of work have also upset the arithmetic at the overstretched state pensions scheme.
Recent data and business confidence surveys suggest output will contract again this year, thrusting Germany into a double-dip recession. Economic institutes have issued dire warnings about the economy “nosediving” in the first half of 2003, while the government’s own economic advisers have slashed their growth forecasts. The European commission has forecast Germany’s deficit’s this year will decline only marginally to 3.1 per cent.
The government admits it faces a tax revenue shortfall of 15.4 pound billion as sluggish growth, high unemployment and a wave of corporate failures depress tax receipts. Germany is now under pressure to put its financial house in order or face the EU fines. That, say economists, effectively rules out any prospect of a stimulus to boost domestic demand and jump-start the weakening economy. It is already aiming to cut spending and raise taxes in a desperate bid to close the gaping hole in its budget finances. But the recent collapse in the economic expectations index of the ZEW research institute, which carries out a monthly survey of institutional investors and economists, points to broad unease in the business community over the government’s economic policies.
Economists fear that the government’s tough austerity measures run the risk of further tipping the stagnating Germany economy towards recession. Even the Bundesbank, the German central bank, has warned that the government’s tax plans will burden the investment climate and hit long-term growth.
Spain is on the path of economic recovery but Spanish banks are not aware of it. Instead, the financial sector is bracing itself for another tough, competitive year, with scant demand for credit other than in the mortgage department. Companies are not investing, there is little demand for letters of credit. The government forecasts economic growth of a 3 per cent but business confidence is quite low. Only mortgage lending is increasing, and even that is not sustainable.
For the first time, economists are beginning to factor in the worldwide slump in share prices when they forecast consumer confidence, demand, and how this may affect economic growth. A general rule of thumb is that a 10 per cent fall on the Spanish bourse shaves 0.3 percentage points off the GDP growth. Given that the Bolsa has lost one-third of its value that would mean the economic growth is 0.9 per cent lower than it would otherwise have been.
However, economists point out that mitigating factors, such as the sustained rise in house prices over the past five year. Nevertheless, there is little doubt that Spaniards feel poorer than a year ago and are reining in spending accordingly. The Bank of Spain estimates that more than 72 billion pounds was wiped out from the underlying value of family share portfolios in the year to March, while the absolute level of household savings fell by 13 billion to 1,171 billion pounds. Since then, the stock market has taken another plunge.
At the same time, household debt — mainly in the form of home loans — has risen to record levels. The Bank of Spain estimates household indebtedness now accounts for 77 per cent of disposable income, compared with 40 per cent in 1994. Lower interest rates and longer repayment periods have made this debt more manageable, but the central bank also warns that from now on, consumer spending — one of the key variables driving the economic growth — will be a lot more sensitive to changes in interest rates, employment, wage levels and the general climate of business confidence.
Economic data showed the economy remains in the trough of a slowdown, with no sign of the recovery the government insists is imminent. Unemployment rose while industrial production fell and the services Purchasing Managers’ Index slowed. Economic growth averaged 2 per cent last year, while governor of the Bank of Spain says growth would probably dip below 2 per cent and the government is unlikely to meet its forecast growth of 3 per cent this year.
A review of Greece’s national accounts by Euro-stat, the European Commission’s statistical office, has exposed some embarrassing flaws in the government’s book-keeping. As a result, last year’s budget surplus, billed by the socialist government as an unprecedented achievement, has turned into a deficit, and the same is set to happen this year. According to revised figures announced earlier this month. Greece recorded a budget deficit last year of 1.8 per cent of gross domestic product, against a surplus of 0.1 per cent of the GDP shown by the finance ministry. Projected surplus of 0.5 per cent of the GDP for 2003 is set to become deficit of 0.9 per cent of the GDP.
Balancing the budget after more than 20 years of running deficits had a symbolic importance for the government. But because of the high debt to the GDP ratio, there’s a real need to generate big primary surpluses. Earlier this year, Euro-stat ruled that revenues from securitization issues and privatization bonds could not be used to write down the public debt. While Greece had raised smaller amounts that some euro-zone members, securitization issues and convertible bonds amounted to a higher percentage of the GDP. The ruling has resulted in a significant increase in Greece’s public debt from 99.8 percent to 107.6 percent of GDP — the third-highest in the euro-zone after Belgium and Italy.
With the economy projected to expand this year by 3.8 per cent, driven by high levels of public and private investment in the run-up to the 2004 Olympic Games the government says this year’s revenue targets will be met. The budget forecasts have also been revised downward to reflect Euro-stat’s findings, with spending increases cut from 6.3 per cent to 6.0 per cent and revenue growth from 5.6 per cent to 5.1 per cent. But public investment is still forecast to rise by a record 13 per cent to ensure funds are available to complete projects for the Olympic games.
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