2024-01-12 03:45:29
“Consumers can spend more money once more”
The economic difficulties in Europe will soon be over, says Marc Brütsch. The monetary policy of the central banks also contributes to this.
Consumers in the best shopping mood: shopping on Zurich’s Bahnhofstrasse.
Photo: Walter Bieri (Keystone)
Mr. Brütsch, the economic forecasts for 2024 are moderate. Is the glass half full or half empty?
Half full. After a mild downturn, there is now tailwind once more, especially in Europe: on the one hand through the prospect of interest rate cuts and on the other hand through real wage growth. Consumers can spend more money once more.
In which countries?
In Great Britain, wages are already rising faster than inflation. Significant wage increases are expected in Germany and France next year.
And in Switzerland?
This catch-up effect is somewhat less noticeable here. In 2023 we had zero wages, and there are only signs of a slight increase for the coming year.
Wouldn’t it be time for significant growth here too? The wage losses from 2022 have not yet been compensated for.
The bottom line is that wages have not been able to keep up with inflation in recent years. There is therefore a certain amount of catching up to do. Apparently the unions have not yet been able to close this gap in wage negotiations. However, collective wage negotiations only affect part of the employment relationships. Many people have changed jobs independently and were able to increase their salary in the process. What also cushions the need for real wage increases is the strong franc. Imported products become cheaper.
Nevertheless, many people have the impression that they have become poorer.
The inflation of recent years certainly contributes to this – including health insurance premiums, which are not included in the measured inflation but still reduce purchasing power. I would expect this feeling to subside over the next one or two years – especially if it is confirmed that the current downturn will not lead to large-scale unemployment. From around the middle of the year, the economy should start to look up once more.
You estimate growth of 1 percent for Switzerland in 2024. This corresponds to zero growth if you exclude immigration. Is the glass really half full?
What matters most to me is the outlook for the future. The economic downturn is likely to have bottomed out soon. Central banks will most likely cut key interest rates this year. Industrial companies can already refinance more cheaply today. And construction activity is therefore likely to pick up speed once more.
However, monetary policy is currently still restrictive. Don’t you underestimate the slowing effect that this will have over the next one to three years?
In my opinion, the braking effect of monetary policy in Europe has already started. Banks very quickly passed on the rising interest rates to companies. In the USA it’s a little different. Here, the interest rate increases are only gradually reaching companies. This might have a serious impact on the economy, which has been surprisingly robust so far.
How much pressure are central banks under to lower interest rates?
Compared to expectations on the financial markets: quite strong. It is currently assumed that key interest rates in the USA and the Eurozone will each fall by around 1.5 percentage points over the next year. The central banks will soon have to clarify whether these assessments are realistic.
Just a few weeks ago, the President of the European Central Bank, Christine Lagarde, categorically ruled out a discussion regarding interest rate cuts.
Nevertheless, we expect the European Central Bank to cut interest rates for the first time in April given the rapid decline in inflation. Of course, that would be tantamount to a U-turn – and one would have to see it as an admission that the monetary authorities in Frankfurt have overestimated inflation. But I can well imagine that, looking back, people will say: It was a mistake to raise interest rates once more in September 2023.
When will the Swiss National Bank lower key interest rates?
We expect a rate cut of 0.25 percentage points in September and a further rate cut of 0.25 percentage points in December 2024.
Could the strong franc accelerate this timetable?
At the end of November the euro-franc exchange rate was 97 centimes; today it is 93 centimes. The franc has already become significantly more expensive compared to the euro, and it has also gained ground once morest the dollar. The main reason for this is the interest rate turnaround that is underway in Europe and the USA. It makes the euro and the dollar less attractive as investment currencies compared to the franc. But this effect has now been priced in. We see little immediate reason for the franc to become even stronger.
And what if that happens?
The National Bank should then respond primarily by intervening in the foreign exchange market. This means that the National Bank buys foreign currencies in order to weaken the franc.
The industry is already complaining regarding the strong franc.
But it has already successfully proven several times that it knows how to deal with the strong franc. There have been regular appreciation surges since the 1970s. The industry has largely adapted to this. Many export companies are very specialized and operate in niche markets. From their point of view, the franc exchange rate is not that important. The global economy is more important.
Is there a pain threshold for the franc exchange rate?
At 90 centimes per euro you will probably say: It doesn’t work here anymore.
Overall, has the National Bank done a good job in recent years?
Yes. I would give National Bank President Thomas Jordan a wreath for not raising interest rates once more in September. This is a sign of independence.
Nevertheless, the National Bank cannot make any distributions.
Yes, but that is not the goal of monetary policy either.
Where will the interest rates be in the long term?
We set the neutral key interest rate at 1.25 percent. At this level the economy is neither stimulated nor slowed down. It is the average over the business cycle.
So is the era of zero interest rates over?
From the euro crisis to the pandemic, key interest rates were at zero or even below. An important reason for this was that inflation was also very low: around zero. We expect average inflation rates of around 1 percent in the future. For this reason, interest rates should be around 1 percent higher on average than before the pandemic. This can be seen as normalization following the era of zero interest rates.
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