Complete Quarterly Bulletin...SNB 5 Quarterly Bulletin 1/2008 Sectional breakdown of bulletin Q1/2008 Monetary policy report (p. 6) With persistent turmoil disrupting the interna-tional

Swiss National BankQuarterly Bulletin

March 1/2008 Volume 26

SNB 3 Quarterly Bulletin 1/2008

Contents

5 Sectional breakdown of bulletin Q1/2008

6 Monetary policy report

40 The economic situation from the vantage point of the delegates for regional economic relations

44 Small and medium-sized exporters: Challenges when developing new markets

52 SNB Working Papers: Summaries

58 Chronicle of monetary events



Sectional breakdown of bulletin Q1/2008

Monetary policy report (p. 6)With persistent turmoil disrupting the interna-

tional financial markets since summer 2007, growthof the world economy slowed noticeably at the endof 2007. Further weakening is to be expected in themonths to come. Deteriorating financing conditionsand wealth losses provoked by falling share and realestate prices are exerting dampening effects. Inaddition, the fact that energy and raw materialprices are increasing across a broad front is having anegative effect on economies in the industrialcountries.

Unlike most other industrial countries,Switzerland experienced higher economic growth inthe fourth quarter of 2007. Employment againrecorded a considerable increase and the rate ofunemployment continued to fall, although at aslower rate. Nevertheless, a number of indicatorssuggest that the growth in GDP will slow in thecourse of 2008. For 2008, the SNB is forecasting realGDP growth of 1.5–2.0%, which represents a down-ward revision of its December 2007 forecast. More-over, the economic risks have risen as a result of thefinancial market turbulence.

At its quarterly assessment of 13 March 2008,the SNB decided to leave its target range for thethree-month Libor unchanged at 2.25%–3.25%.

The economic situation from the vantage point of the delegates forregional economic relations (S. 40)Most of the 170 or so representatives of vari-

ous economic sectors and industries interviewed bythe SNB delegates for regional economic relationsbetween December 2007 and February 2008 re-ported continued good business activity. The indus-trial sector and consumer-related industries, such asretail and tourism, performed particularly well.Given the high level of capacity utilisation, the cur-rent year should again see some significant invest-ment. In contrast to the autumn 2007 round oftalks, however, financial market turbulence and theuncertainty this is causing put a dampener on sen-timent, thus nipping any euphoria more or less inthe bud.

Small and medium-sized exporters: Challenges when developing new markets(p. 44)In October 2007, the SNB delegates for

regional economic relations conducted a survey ofsmall and medium-sized exporters relating to chal-lenges in developing new markets. The surveyrevealed that these companies are already wellintegrated in the global economy and that thisprocess is continuing at a fast pace. Even thoughthe exporters surveyed are so heavily committedabroad, they continue to increase added value,number of employees and labour productivity attheir Swiss location. This suggests that, in general,the integration of these companies in the globaleconomy tends to increase the growth opportuni-ties of the Swiss economy.

SNB Working Papers (p. 58)Summaries of four papers: Jean-Marc Natal

and Nicolas Stoffels, ‘Globalisation, markups andthe natural rate of interest’, SNB Working Paper2007-14; Martin Brown, Tullio Jappelli und MarcoPagano, ‘Information sharing and credit’, SNB Work-ing Paper 2007-15; Andreas M. Fischer, MatthiasLutz und Manuel Wälti, ‘Who prices locally?’, SNBWorking Paper 2007-16; Angelo Ranaldo und PaulSöderlind, ‘Safe Haven Currencies’, SNB WorkingPaper 2007-17.


Monetary policy report

Report for the attention of the Governing Board of the Swiss National Bankfor its quarterly assessment of March 2008

This report is based primarily on the data and information available as atmid-March 2008.


Contents of the ‘Monetary policy report’

8 About this report

9 Monetary policy decision

11 1 Developments in the global economy

15 2 Developments in the Swiss economy15 2.1 GDP growth and outlook17 2.2 Foreign trade, consumption and investment20 2.3 Employment and labour market21 2.4 Capacity utilisation23 2.5 Goods prices

27 3 Monetary developments27 3.1 Interest rates and inflation expectations30 3.2 Exchange rates32 3.3 Equity, commodity and real estate prices34 3.4 Monetary aggregates36 3.5 Credit

37 4 The SNB inflation forecast37 4.1 Assumptions for global economic developments39 4.2 Inflation forecast for Q1 2008 to Q4 2010

38 Inflation forecasting as part of the monetary policy concept


About this report

The Swiss National Bank (SNB) has a statutory mandate to pursue amonetary policy serving the interests of the country as a whole. It ensuresprice stability while taking due account of economic developments.

It is a particular concern of the SNB that its monetary policy be under-stood by a wider public. However, it is also obliged by law to informregularly of its policy and to make its intentions known. This ‘Monetary policy report’ performs both of these tasks. It describes economic andmonetary developments in Switzerland and explains the inflation forecast.It shows how the SNB views the economic situation and what conclusions for monetary policy it draws from this assessment.

Sections 1–3 of the present report were drawn up for the GoverningBoard’s assessment of March 2008. The sections headed ‘Monetary policy decision’ and ‘4 The SNB inflation forecast’ take due account of theGoverning Board’s monetary policy decision of mid-March 2008.

Unless otherwise stated, all rates of change from the previous periodare based on seasonally adjusted data and are annualised.


Monetary policy decision

Since the last quarterly assessment by the SNBin December 2007, the international economicenvironment has deteriorated. In the euro area,growth in GDP in the fourth quarter of 2007 washalf of what it had been in the previous quarter,while in the US, it almost came to a standstill. Inview of the financial market turmoil that has per-sisted since summer 2007, a further weakening inglobal economic growth can be expected in themonths to come. Deteriorating financing conditionsand wealth losses provoked by falling share and realestate prices are exerting dampening effects. Inaddition, the fact that energy and raw materialprices are increasing across a broad front is havinga negative effect on economies in the industri-alised countries.

Within this context, the SNB has made adownward revision to the international economicscenario upon which its medium-term inflationforecast is based. It now anticipates considerablylower economic growth for the US in 2008 than itdid in December, and is also adjusting its forecastsfor Europe downwards, although to a lesser extent.At the same time, the SNB expects a higher level ofinflation in the industrialised countries as a resultof rising oil prices.

As opposed to most other industrial countries,economic growth in Switzerland increased in thefourth quarter, and employment also rose consider-ably again. However, due to the expected slowdownin global economic growth and the renewedstrengthening of the Swiss franc, GDP growth islikely to falter in Switzerland, too. For 2008, theSNB is expecting real GDP growth of 1.5–2.0%,which represents a reduction of its December 2007forecast. The economic risks have also increasedsubstantially.

This was also reflected in the discussions con-ducted by the SNB delegates for economic relationsfrom December to February with the representativesof different industries and economic sectors.Although the representatives are still confident asregards the next few quarters, most expected aslowdown in business.

At its quarterly assessment on 13 March, theSNB decided to leave the target range for the three-month Libor unchanged at 2.25–3.25% and to keepthe rate in the middle of the target range for thetime being.

This decision took account of both short andmedium-term considerations. On the one hand,capacity utilisation in the Swiss economy remainsat a high level at the time of the monetary policydecision and inflationary pressure has increased.Consequently, the rate of inflation is likely toremain slightly above 2% until the end of the year,which is above the range that the SNB equates withprice stability. On the other hand, the anticipatedflattening in economic growth in Switzerland willreduce excess demand, and this will improve theinflation outlook in the medium term. Assuming anunchanged three-month Libor of 2.75%, the SNBforecasts average inflation of 2% in 2008, and1.4% in 2009 and in 2010. This means that thepath of the medium and long-term forecast will runbelow that of December 2007. Although upsiderisks are associated with the inflation forecast forthe current year, the risks for the years that followare more symmetrical. In view of the favourablemedium-term inflation outlook, the SNB is main-taining an unchanged monetary policy course.


Inflation forecast of December 2007 with Libor at 2.75% and of March 2008 with Libor at 2.75%Percentage change in national consumer price index from previous year

Inflation Forecast December 2007 (2.75%) Forecast March 2008 (2.75%)%

0.5

1

1.5

2

2.5

2004 2005 2006 2007 2008 2009 2010

Inflation forecast of March 2008 with Libor at 2.75% 2008 2009 2010

Average annual inflation in percent 2.0 1.4 1.4


1 Developments in the global economyAgainst the background of the turbulence that

has been persistently afflicting the internationalfinancial markets since the summer of 2007, globaleconomic growth slowed perceptibly in the fourthquarter of 2007. While GDP growth in the euro areahalved from the previous quarter, growth in theUnited States came almost to a standstill. TheAsian economies, however, continued to expandrobustly, underpinned mainly by the strong growthin China.

Global economic growth can be expected toweaken further in the months ahead. This alsoemerges from 2008 GDP forecasts for the US, theeuro area and Japan. Since November 2007 a num-ber of different institutions have made downwardrevisions to their forecasts for these regions orcountries. Factors tending to curb growth includenot only the deterioration in credit conditions butalso wealth losses caused by falling share and prop-erty prices. Growth in the industrialised countries isalso hampered by the fact that energy and com-modity prices are rising across a broad front.

Graph 1.1Real GDP

Year-on-year changeUS Japan Euro area Switzerland

%

1

1.5

2

2.5

3

3.5

4

4.5

2004 2005 2006 2007 2008

Graph 1.2Purchasing managers' indices (manufacturing)

US Japan Euro area Switzerland

47.5

50

52.5

55

57.5

60

62.5

65

67.5

2004 2005 2006 2007 2008

Sources: State Secretariat for Economic Affairs (SECO), Thomson Datastream, SNB

Source: Thomson Datastream

Increasing danger of recession in the USGDP growth in the United States fell to 0.6%

in the fourth quarter compared to almost 5% in theprevious period. This slump was due mainly to aheavily negative contribution from inventories anda smaller export surplus. Growth in private con-sumption also slowed, and the decline in residen-tial property investment gathered pace. Only com-mercial and industrial construction continued toexpand strongly.

The economic outlook has deteriorated furthersince December. There is still no sign of an end tothe correction in residential property investment.The labour market situation has also worsened. Forinstance, employment fell in January and Februaryfor the first time in just over four years. Togetherwith the wealth losses, this is likely to hold backprivate consumption. The stimulative effect of USmonetary and fiscal policy should, however,become increasingly perceptible as the year pro-gresses. The tax refunds offered as part of the Jan-uary 2008 fiscal package are likely to bolster pri-vate consumption, while the higher depreciationallowances should boost corporate investment. TheGDP consensus forecast for 2008 fell from 2.3% to1.6% between November and February but is pro-jecting stronger GDP growth of 2.6% for 2009.


Weaker growth in the euro areaGDP growth also weakened in the fourth quar-

ter in the euro area, which – following the acces-sion of Malta and Cyprus – now comprises 15 coun-tries, although the slowdown was not as great as inthe US. Real GDP grew by 1.5%, after vigorousgrowth in the third quarter (+3.0%). As a result ofcontracting private consumption and a slowdown inthe growth of investment, domestic demand stag-nated. The growth in exports also slackened. Thelabour market situation remained robust, however,and the unemployment rate reached 7.1% in Janu-ary, the lowest level for 25 years.

Restrained growth may be expected for theeuro area in the quarters ahead. Manufacturers stillgive a positive verdict on order books and theemployment situation, and stronger growth inemployee incomes is driving private consumption.However, exports and investment will probably losefurther momentum as a result of the less favourableinternational economic environment and tightercredit conditions. The more restrictive depreciationrules that came into effect in Germany at the

Graph 1.3Oil prices

Brent crude oilUSD per barrel CHF per barrel

USD CHF

30

40

50

60

70

80

90

100

2004 2005 2006 2007 2008

40

50

60

70

80

90

100

110

beginning of the year will have an additional damp-ening effect. The gloomier investment climate isalso reflected in the European Commission’s half-yearly investment survey, which projects slowerinvestment growth for this year. The GDP consensusforecast for 2008 fell by 0.4 percentage points to1.6% between November and February.

Solid growth in Asia for the time beingUnlike the US and the euro area, the Asian

economies were expanding strongly up to end-2007. Following moderate growth in the third quar-ter, real GDP in Japan increased by 3.5% in Q4.Despite a slackening in demand from the US,exports rose strongly, as did equipment investment.Private consumption, by contrast, continued toincrease only modestly, while spending on housingconstruction fell sharply once again owing to thetighter building regulations introduced in 2007.The economic outlook for Japan has also deterio-rated somewhat, however. Strong demand from theAsian economic area continues to provide positivestimuli, which is reflected in the optimism being

Graph 1.4Consumer prices

Year-on-year changeUS Japan Euro area Switzerland

%

0

1

2

3

4

5

2004 2005 2006 2007 2008

Sources: Swiss Federal Statistical Office (SFSO), Thomson DatastreamSource: Reuters, SNB


expressed by the big exporting companies. How-ever, with consumer demand flat, the businessenvironment has deteriorated for companies thatrely more on the domestic market. The GDP consen-sus forecast for 2008 was 1.4% in February, or 0.4percentage points lower than in November.

In China, real GDP rose by 11.4% in the fourthquarter compared to the same period a year earlier.In average annual terms, GDP growth was thus inexcess of 10% for the fifth year in succession.Growth continued to be driven primarily by exportsand investment. During the course of the year therewere, however, emerging signs of a slight shifttowards private consumption, which was accompa-nied by higher import demand. The small easternAsian economies also recorded strong growth. Onaverage, real GDP in Hong Kong, Korea, Singaporeand Taiwan was 5.9% higher in the fourth quarterthan in the corresponding period of the previousyear. The main driving force was strong globaldemand for IT goods. Because of the economicslowdown in the industrialised countries, however,demand may well falter in the months ahead, thus

impacting on GDP growth in the smaller Asianeconomies. Due to strong domestic demand, theChinese economy, by contrast, has great internalmomentum which makes it less sensitive to theslowdown in the industrialised countries. The GDPconsensus forecast for China for 2008 was 10.3% inFebruary, much the same as in November.

Inflationary pressure rising Measured by consumer prices, annual inflation

rates have been rising steadily world-wide sinceOctober. The main driving forces have been higherenergy and food prices, but inflationary pressurehas also been driven up by higher production costs.Annual inflation in the US rose from 3.5% to 4.3%between October and January. Over the same period core inflation – which excludes energy andfood prices – rose by 0.3 percentage points to2.5%. In the euro area, annual inflation reached3.2% in January, its highest level in 14 years andthus also the highest since the beginning of Euro-pean Monetary Union in 1999. Core inflation, onthe other hand, fell slightly to 1.7%, since the

Graph 1.5Official interest rates

US Japan Euro area UK Switzerland

%

1

2

3

4

5

6

2004 2005 2006 2007 2008

Graph 1.6OECD composite leading indicators

6-month rate of changeUS Japan Euro area Switzerland

%

–5

–2.5

0

2.5

5

7.5

10

12.5

2004 2005 2006 2007 2008

Source: OECDSources: Thomson Datastream, SNB


Economic growth1 Inflation2

November February November February

2008 2009 2008 2009 2008 2009 2008 2009

United States 2.3 – 1.6 2.6 2.6 – 2.9 2.0Japan 1.8 – 1.4 1.9 0.4 – 0.5 0.5Euro area 2.0 – 1.6 1.9 2.1 – 2.5 2.0

Germany 2.1 – 1.7 1.9 1.8 – 2.1 1.7France 1.9 – 1.6 1.9 1.8 – 2.2 1.8Italy 1.3 – 1.0 1.4 2.2 – 2.5 2.0

United Kingdom 1.9 – 1.7 2.0 2.0 – 2.4 2.0Switzerland 2.0 – 2.0 1.9 1.3 – 1.6 1.3

Consensus forecasts Table 1.1

1 Real GDP, year-on-year change in percent2 Consumer prices, year-on-year change in percentSource: Consensus Forecasts, November 2007, February 2008. Consensus forecasts are monthly surveys conducted among over 240 companiesand economic research institutes in more than 20 countries, covering predictions for the expected development of GDP, prices and othereconomic data. The results are published by Consensus Economics Inc., London.

increase in German VAT in January 2007 droppedout of the equation. In Japan, annual inflation hadrisen by 0.4 percentage points to 0.7% by January,but the core rate was still in negative territory.Finally, much higher inflationary pressure was alsoevident in China, as well as in a number of smallerAsian economies. The main factor here was thesteep increase in food prices.

Differing monetary policiesMonetary policy was still dominated by the

turbulence on the financial markets. In a bid toreduce tensions, central banks repeatedly providedthe money markets with temporary additionalliquidity. In concert with the US Federal Reserve,the European Central Bank and the SNB also fur-nished the banks with liquidity in US dollars to tidethem over the year-end. These measures helpedrestore some calm to the money markets, but thenervousness has increased again recently.

The US Federal Reserve also cut its key inter-est rate twice in quick succession in January, redu-cing it by a further 1.25 percentage points to 3.0%.In doing so, it was reacting to the growing threatof a recession in the US. The Fed also held out theprospect of further rate cuts if the economy were toweaken more than had been assumed hitherto.Unlike the Fed, the European Central Bank (ECB)left its main interest rate, the refinancing rate,unchanged at 4.0%. It pointed to the increasedthreat of inflation, although it did also make moremention of the risks to growth. The Bank of Japanalso left its overnight call money rate unchanged at0.5%. By contrast, China’s central bank tightenedits monetary policy further in an attempt to curblending growth. Consequently, it raised the mini-mum reserve rate in stages by a total of 1.5 per-centage points to 15.0%. As a result, the rate hasnow doubled since monetary policy began to betightened again in mid-2006.


Graph 2.1Real GDP

Change from previous periodQuarterly national accounts

%

–1

0

1

2

3

4

5

2004 2005 2006 2007 2008

Graph 2.2Manufacturing output

Change from previous period (rhs)Expectations Output (rhs)

Balance %

10

12.5

15

17.5

20

22.5

25

2004 2005 2006 2007 2008

0

2

4

6

8

10

12

2 Developments in the Swiss economy

2.1 GDP growth and outlook

Stronger growth in the final part of the year Unlike most other industrialised countries,

growth in Switzerland accelerated in the fourthquarter. According to estimates from SECO (theState Secretariat for Economic Affairs), real GDProse by 4.2% from the previous period and was thus3.6% higher than the corresponding level a yearearlier. At the same time, the figures for the secondand third quarters were revised upwards. Real GDPthus rose by an annualised 3.1% in 2007.

To a large extent, the high GDP growth in thefourth quarter is attributable to the positive contri-bution to growth from inventories. However, thiscomponent is difficult to interpret, due to the factthat it is calculated as a residual variable and there-fore contains the statistical error. Final domesticdemand excluding inventories rose by 1.3%, afterhaving fallen slightly in the previous period. Follow-ing their robust growth in the third quarter, how-ever, exports lost momentum. Since imports pickedup at the same time, the external contribution toGDP growth was negative.

Output-side figures for GDP revealed a pictureof broadly-based growth. Value added by industryincreased further, although the rate of growthslowed as compared with the previous period. This isalso reflected in the SFSO production statistics (cf.graph 2.2). By contrast, strong growth stimuli onceagain emanated from the retail and hospitality sec-tors and financial services. The banks benefitedfrom further expansion in interest-differential busi-ness and trading activity. However, valuation losses– as stated by some banks in the fourth quarter – donot enter into the calculation of added value. Theyare, nevertheless, of significance for the economysince they increase the costs of external funding forcompanies whose balance sheets undergo a qualita-tive deterioration. In the case of a bank, this canlead to a situation where the bank is obliged tocharge more for its loans or to ration them.

Slowdown in growth expected A number of indicators suggest that GDP

growth will weaken in the first half of 2008. Theseinclude the decline on the international equity mar-kets in the first quarter, which is likely to impact onadded value in the banking sector. Given that exportdemand is also weakening, activity in industry mustalso be expected to slow. According to the results ofthe KOF/ETH surveys, new orders in the exportindustry fell in January and production plans were

Source: SECO Sources: SFSO, Institute for Business Cycle Research at ETH Zurich (KOF/ETH)


2004 2005 2006 2007 2006 2007

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Private consumption 1.6 1.8 1.5 2.1 –0.2 2.5 –0.4 1.6 2.9 2.3 3.2 1.5Government consumption 0.8 0.5 –1.4 0.1 –1.2 –6.3 4.7 1.7 –0.6 0.7 –2.7 –0.3Investment in fixed assets 4.5 3.8 4.1 2.7 –0.2 4.3 3.0 5.9 0.6 12.3 –10.6 1.7

Construction 3.9 3.5 –1.4 –2.9 –6.0 0.2 0.8 3.1 –1.7 –13.9 –5.3 7.4Equipment 5.0 4.0 8.9 7.2 5.2 7.6 4.7 8.1 2.5 37.0 –14.2 –2.3

Domestic final demand 2.1 2.1 1.7 2.0 –0.3 1.8 1.0 2.6 1.9 4.4 –0.9 1.3Domestic demand 1.9 1.8 1.4 0.3 –2.9 5.3 –3.7 5.6 –6.6 3.7 –0.8 9.1Total exports 7.9 7.3 9.9 9.9 16.5 –1.0 12.0 19.0 10.7 5.2 10.3 1.4

Goods 7.3 5.8 11.1 8.4 20.6 –0.6 14.3 18.4 11.3 –0.5 8.5 –3.6Excluding valuables1 7.3 6.5 11.3 8.4 16.3 8.6 6.9 19.3 7.0 5.3 7.7 –2.0

Services 9.7 11.2 6.8 13.7 6.3 –2.1 6.2 20.7 9.1 22.1 15.1 14.8Aggregate demand 3.8 3.6 4.3 3.7 3.5 3.0 1.7 10.3 –0.4 4.3 3.3 6.1Total imports 7.3 6.7 6.9 5.2 3.2 4.0 –2.8 32.1 –7.1 5.1 2.4 10.2

Goods 5.8 5.6 7.8 4.6 8.7 3.0 –7.9 43.4 –9.7 4.7 –1.3 8.8Excluding valuables1 5.9 5.3 7.4 6.4 9.1 1.2 –5.5 34.0 2.4 1.7 –0.5 9.4

Services 14.7 11.6 2.7 8.0 –18.9 8.7 24.6 –9.6 6.9 7.0 21.5 16.9GDP 2.5 2.4 3.2 3.1 3.6 2.6 3.6 1.9 2.7 3.9 3.7 4.2

Real GDP and components Table 2.1Growth rates on previous period, annualised

1 Valuables: precious metals, precious stones and gems as well as objets d'art and antiquesSource: SECO


also being scaled down. However, the retail andhospitality trade surveys continued to paint afavourable picture, which suggests that these areasshould continue to underpin growth.

The SNB is now forecasting an increase in realGDP of 1.5–2.0% for 2008. This represents a down-ward revision of its December 2007 forecast ofaround 2% growth. Moreover, given the turbulenceon the financial markets and its possible impact onglobal growth, the economic risks have increasedsignificantly.

The heightened uncertainty was also reflectedin the talks held between December and February bythe SNB delegates for regional economic relationswith representatives of various sectors and indus-tries. Although these representatives were generallyconfident about the coming quarters, most of themexpected growth to weaken during the course of theyear. While no tightening of credit terms had beenobserved up to now, some representatives were wor-ried about future loan negotiations. Rising pricesfor energy, industrial raw materials and agriculturalproduce, together with the low dollar exchange rateconstituted a considerable burden. The severe short-age of specialists remained a further source of con-cern (cf. ’The economic situation from the vantagepoint of the delegates for regional economic rela-tions’, March 2008).

2.2 Foreign trade, consumption and investmentSlower export growthThe economic slowdown in the industrialised

countries, coupled with with the appreciation ofthe Swiss franc, has led to a perceptible slowing ofexports in real terms. This affected exports ofgoods, which fell slightly from the previous period.By contrast, exports of services expanded asstrongly as before. While a sharper increase inincome from tourism and international transportwas recorded, commission income from bankingbusiness with foreign clients fell. Total exportswere up 7.1% on the same period of the previousyear, compared to 11.9% in the third quarter.

Among exports of goods, exports of semi-fin-ished and investment goods contracted. Althoughdeliveries of consumer goods continued to grow,the rate of growth declined. Broken down byregion, exports to the US and Japan fell further.While demand from Europe lost considerablemomentum, demand from south-east Asia, Chinaand most oil-exporting countries remained robust.

Graph 2.3Exports

Change from previous periodGoods (excluding valuables) Services

%

0

10

20

30

40

50

2004 2005 2006 2007 2008

Graph 2.4Exports by trading partners

Year-on-year change; 2006 shares in bracketsEU27 (62.0%) US (10.3%) Asia1 (11.6%)

%

–5

0

5

10

15

20

2004 2005 2006 2007 2008

Source: SECO 1 Asia: Japan, China, South Korea, Hong Kong, Singapore, Taiwan,Malaysia, Thailand, Philippines, IndonesiaSource: Federal Customs Administration (FCA)


Surge in imports Boosted by strong domestic demand, imports

in real terms rose appreciably in the fourth quarter,having shown only a modest increase in the courseof the year prior to that. Compared to the previousyear, they were 5.0% higher. Both goods and ser-vices contributed to the increase. Import volumeswere higher in all categories of goods apart frompharmaceuticals. As regards imports of services,expenditure on tourism and on licences and patentswere once again the main items exhibiting stronggrowth.

Robust growth in consumptionPrivate consumption was a significant main-

stay for growth in the fourth quarter as well, eventhough the growth rate of 1.5% was less than halfof what it had been in the previous period. Con-sumption of both goods and services increased.Although retail sales lost momentum compared tothe previous period owing to unexpectedly weakdemand in the clothing and footwear segment,durable goods expenditure rose strongly. This

manifested itself in an almost 10% rise in importsof durable consumer goods and new car registra-tions compared to the previous period. The numberof overnight stays in hotels – an indicator of theconsumption of services – also reflected healthygrowth. Favoured by good snow and weather con-ditions, the number of overnight stays by domesticguests was up 7.9% on the previous period.

The aggregate consumer sentiment indexcompiled in January remained at the high level ofthe two previous surveys in October and July 2007.Although the households surveyed were once againa little less optimistic than before about the gen-eral future economic situation, they still ratedtheir own financial situation and job security asgood. According to initial estimates, real employeeincomes look set to increase significantly (by justover 2.8%) in 2008 as well, though falling wellshort of last year’s figure of 5.0%. This weakeningis attributable to the slower increase not only inemployment but also in wages and salaries. Thevariable components of wages and salaries, in par-ticular, are likely to be lower than last year.

Graph 2.5Imports

Change from previous periodGoods (excluding valuables) Services

%

–10

0

10

20

30

40

2004 2005 2006 2007 2008

Source: SECO

Graph 2.6Private consumption

Change from previous period (rhs)Consumer sentiment Private consumption (rhs)

Balance %

0

25

50

2004 2005 2006 2007 2008

0

2

4

Source: SECO


Increase in construction investment –drop in equipment investmentConstruction investment increased in the

fourth quarter compared with the previous period,having fallen in the first three quarters of the year.The main contributors to this good outcome includ-ed the intermittent investments in civil engineer-ing projects and – to a somewhat lesser extent –higher investment in commercial property construc-tion. By contrast, house-building activity declinedagain. The continuing decrease in residential build-ing permits points to a further decline in residentialproperty investment in the quarters ahead; higherinvestment in the other construction segments isunlikely to compensate for this.

Equipment investment contracted slightlyagain in the fourth quarter, having fallen heavily inthe third quarter. Although investment in industri-al machinery, precision instruments and IT productsrose appreciably, this was offset by a steep drop inaircraft purchases and stagnating software invest-ment. Given that capacity utilisation is still veryhigh, we can expect to see an increase in capitalinvestment over the coming quarters. The rate ofgrowth is, however, likely to weaken gradually inthe course of the expected economic slowdown.

Graph 2.7Construction

Change from previous periodNew housing authorised Construction investment (rhs)

% %

–10

–5

0

5

10

15

2004 2005 2006 2007 2008

–20

–10

0

10

20

30

Source: SFSO, SECO

Graph 2.8Equipment

Change from previous periodImports Equipment investment (rhs)

% %

–25

0

25

50

75

100

2004 2005 2006 2007 2008

–10

0

10

20

30

40

Sources: FCA, SECO


2.3 Employment and labour market

Steeply rising employmentThe strong growth in employment that began

two years ago continued in the fourth quarter. Thenumber of people in employment was up 2.8% fromthe previous period and was thus 2.7% higher than12 months previously. The biggest increases in theworkforce were reported by the manufacturing andconstruction industries. By contrast, job growth inthe services sector was relatively modest. Whileemployment in the hospitality and wholesale tradesexpanded quite strongly, the retail trade, alongwith banking and insurance, saw only small in-creases. Converted into full-time equivalents, thenumber of jobs rose by 3.0% in the fourth quartercompared with the previous period, exceeding theprior-year level by 2.8%.

The SFSO index of job vacancies points to aslightly slower increase in employment in the nextfew quarters. Having risen steadily for three years,the index stabilised in the fourth quarter at a highlevel. While demand for labour increased further inmanufacturing and construction, it fell back slight-ly in the services sector.

Slower decline in unemploymentAfter adjustment for seasonal factors, the

number of people registered as unemployed withregional employment offices fell from 102,700 to99,230 between November and February, which isequivalent to a reduction in the unemployment ratefrom 2.6% to 2.5%. The number of people seekingemployment – which, in addition to the registeredunemployed, also includes people on training andemployment programmes or those who have accept-ed an interim placement – fell from 4.0% to 3.9%.

Despite the robust growth in employment, thedecline in unemployment slowed further comparedto previous months. This suggests that some of theunemployed lack the qualifications sought byemployers, leaving vacancies increasingly to befilled by workers recently arrived from abroad or bypeople who have never had a job before. In fact,the number of gainfully active persons of foreignorigin and their participation rate increased strong-ly in the fourth quarter. At the same time, the SFSOsurvey shows that companies are still finding it dif-ficult to recruit suitably qualified staff.

Graph 2.10Vacancy index

Seasonally adjustedManufacturing Construction Services

2003 = 100

100

150

200

250

300

350

2004 2005 2006 2007 2008

Graph 2.11Unemployment rates and vacancies

Seasonally adjustedUnemployed Job seekers Publicitas (rhs)

% 1993 = 100

3

4

5

6

2004 2005 2006 2007 2008

125

150

175

200

Graph 2.9Employment

Change from previous periodFull-time and part-time employment Full-time equivalents

%

0

0.5

1

1.5

2

2.5

3

3.5

2004 2005 2006 2007 2008

Graphs 2.9 and 2.10:Source: SFSO

Graph 2.11:Unemployed and job seekers registered with the regional employmentoffices in percent of the labour force according to the 2000 census(labour force: 3,946,988 persons).Sources: Publicitas, SECO


2.4 Capacity utilisation

If aggregate demand does not move synchro-nously with aggregate supply, inflationary or defla-tionary trends may arise. As a rule, aggregate sup-ply – which is determined by the availability oflabour and capital as well as technologicaladvances – grows at a relatively even pace in theshort term. Changes in the growth of demand aretherefore reflected in fluctuations in the utilisationof technical and labour capacity. If their utilisationrate significantly exceeds its normal level, thispoints to excess demand and, consequently, toincreasing inflationary pressure. Conversely, under-utilisation of capacity indicates excess supply and,consequently, lower inflationary pressure.

Technical capacity utilisation remains highIndicators providing information on capacity

utilisation in the economy include the relevantKOF/ETH surveys. The latest surveys show that util-isation of technical capacity in the manufacturingsector, at 88%, remained above the long-term aver-age of 84% in the fourth quarter (cf. graph 2.12).Despite the high utilisation rate, the situationshowed signs of easing. For instance, the propor-tion of companies planning to expand their cap-

Graph 2.13Output gap

Production function HP filter MV filter

%

–2

–1

0

1

2

3

99 00 01 02 03 04 05 06 07 08

Source: SNB

acity increased. At the same time, the proportion ofcompanies that saw themselves as restricted intheir business due to insufficient technical cap-acity decreased; this figure is now close to its long-term average. Unlike manufacturing, the construc-tion industry saw a reduction in its utilisation rate.But in both sectors a relatively high proportion ofcompanies were still reporting staff shortages. Inthe construction industry, this proportion reachedits highest level since 1995.

As for the service industries, the results yield-ed by the KOF/ETH surveys suggest increasingcapacity constraints. This applies to both technicalcapacity and labour. In the hospitality trade, theoccupancy rate reached a very high level, even on alonger-term comparison. An increasing number ofcompanies in the banking, retail and hospitalitysectors reported staff levels as being too low,although the proportions concerned are uniformlylower than in the boom years of 1999/2000.

Positive output gap wideningA more comprehensive measure of capacity

utilisation in the economy is the output gap, whichis calculated as the percentage difference betweenSwitzerland’s real GDP and its estimated productionpotential. Graph 2.13 shows three estimates of the

Graph 2.12Technical capacity in manufacturing

Seasonally adjustedUtilisation rate Capacity (rhs)

% Balance

84

85

86

87

88

89

2004 2005 2006 2007 2008

0

5

10

15

20

25

Source: KOF/ETH


output gap based on different methods of estimat-ing production potential: the production function(PF), the Hodrick-Prescott filter (HP) and themulti-variant filter (MV). As fourth-quarter real GDProse considerably faster (4.2%) than productionpotential, the production overhang continued toincrease according to all three estimation methods.According to both the production function and themulti-variant filter, it rose to 1.8%, whereasaccording to the Hodrick-Prescott filter it increasedto 1.6%.

The positive output gap continues to be main-ly a reflection of above-average utilisation of tech-nical capacity. In the meantime, however, utilisa-tion of the labour supply has also moved slightlyabove its long-term average. The SNB is projectingthat GDP will grow more slowly than productionpotential over the next few quarters and that theproduction overhang will therefore narrow. Atapproximately 2%, the rate at which productionpotential is growing is at present still higher thanthe long-term average (1.6%). This is mainly due tothe fact that the supply of labour is currently grow-ing relatively strongly as a result of the immigra-tion of foreign workers and the rise in the partici-pation rate.


2.5 Goods prices

Increasing pressure from producer and import pricesThe price pressure exerted by producer and

import prices on downstream consumer pricesincreased further between October and January.Annual domestic producer price inflation rose from2.5% to 3.5%, while imported goods inflationclimbed from 3.1% to 4.1%. The stronger upwardtrend in inflation was observable for almost alltypes of goods. While price pressure was still par-ticularly strong on energy sources and agriculturalproducts, prices of intermediate goods and – evenmore so – consumer goods also continued to rise.One exception was investment goods, where infla-tion remained stable. The increased price pressurestrongly suggests that it will only be a matter oftime before higher energy and commodity pricesand the price increases caused by the depreciationof the Swiss franc against the euro are passed on toend-consumers to a greater extent than hitherto.

Substantially higher consumer price inflationAnnual inflation as measured by the national

consumer price index (CPI) climbed from 1.8% to2.4% between November and February. An increasein inflation had been expected by the SNB in itsmid December inflation forecast, but on a some-what smaller scale. Higher heating oil and fuelprices combined with an unfavourable baselinewere the main factors pushing up inflation. How-ever, even excluding the oil components, consumerprice inflation crept up from 0.9% to 1.3%. Theupward drift in inflation was particularly marked inthe goods segment. This suggests that cost increas-es at the producer level are now increasingly beingpassed on to consumers.

Graph 2.15CPI: Domestic and imported goods and services

Year-on-year changeTotal Domestic Imported Imported excluding oil

%

–2

–1

0

1

2

3

4

5

6

2004 2005 2006 2007 2008

Graph 2.16CPI: Domestic goods and services

Year-on-year changeGoods Priv. services excl. rents Rents Pub. services

%

–0.5

0

0.5

1

1.5

2

2.5

2004 2005 2006 2007 2008

Graph 2.14Prices of total supply

Year-on-year changeTotal Producer prices Import prices

%

–2

–1

0

1

2

3

4

5

2004 2005 2006 2007 2008

Graph 2.14:Source: SFSO

Graphs 2.15 and 2.16:Sources: SFSO, SNB


Higher domestic inflationAnnual inflation for domestic consumer goods

rose slightly from 1.1% to 1.3% between Novemberand February. By February, goods inflation hadgained 0.7 percentage points to 1.5%, driven main-ly by higher prices for food and electricity. Althoughthe 2.2% inflation figure for foods (mainly affectingbread, milk, butter and meat) was still relatively lowcompared to other countries, the price trend observ-able at the producer level suggests that it willincrease further in coming months. By contrast,inflation pressure on rents eased. The residentialrent index, which is compiled on a quarterly basis,rose by 0.6% in February; as a result, annual rentinflation fell from 2.1% to 1.8%. Other private ser-vices, however, saw inflation rise from 0.4% to 0.8%.While prices rose in the hospitality trade and tourismsector, price reductions were granted in telecommu-nications. The year-on-year increase in prices forpublic services, at 1.0%, was roughly the same as inNovember.

Higher imported consumer goods inflationImported consumer goods inflation rose

further, reaching 5.3% in February, compared to3.6% in November. Compared with earlier months, a smaller part of the increase was attributable to oil components (heating oil and fuel). The rate of increase in prices of other foreign consumergoods, which rose from 0.3% to 1.8%, played a greater role. A number of goods, such as gas, fruitand rice, increased especially sharply. In addition,the ‘clothing and footwear’ group was affected bystatistical factors (unusually low sale prices in theprevious year).


Graph 2.17Core inflation rates (SNB)

Year-on-year changeCPI TM15 DFI

%

0

0.5

1

1.5

2

2.5

2004 2005 2006 2007 2008

Graph 2.18Core inflation rates (SFSO)

Year-on-year changeCPI SFSO1 SFSO2

%

0

0.5

1

1.5

2

2.5

2004 2005 2006 2007 2008

Sources: SFSO, SNB Source: SFSO

Slight increase in core inflation ratesInflation, as measured by the CPI, is subject

to short-term fluctuations that may distort percep-tions of the general price trend. For this reason,core inflation rates are calculated with a view tocapturing the underlying inflation trend. The SNBcomputes two measures of core inflation, as shownin graph 2.17. The trimmed means method (TM15)excludes from the consumer price index, for anygiven month, the 15% of goods prices with thehighest annual rates of change and the 15% withthe lowest. Dynamic factor inflation, by contrast,takes into account not only prices but also data onthe real economy, financial market indicators andmonetary variables. The two core inflation ratescalculated by the SFSO always exclude the samegoods from the basket of goods in each period (cf.graph 2.18). In the case of core inflation 1(SFSO1), these are food, beverages, tobacco, sea-sonal products, energy and fuel; core inflation 2(SFSO2) also factors out products with adminis-tered prices.

The core inflation rate calculated in accor-dance with the trimmed means method climbedsteadily between November and February from1.2% to 1.5%, indicating that the general inflationtrend is still rising but remains moderate. The twocore inflation rates calculated by the SFSO alsopresent the same picture, each rising by 0.4 per-centage points to 1.2% and 1.4% respectively.However, dynamic factor inflation, which hasalready been pointing to a slightly rising pricetrend for quite a long time, remained unchanged.


2007 2007 2007 2008

Q2 Q3 Q4 November December January February

Overall CPI 0,7 0,5 0,6 1,7 1,8 2,0 2,4 2,4Domestic goods and services 1.0 1.0 0.9 1.1 1.1 1.2 1.2 1.3

Goods 0.0 –0.2 0.0 0.9 0.8 1.2 1.4 1.5Services 1.2 1.4 1.1 1.2 1.1 1.2 1.2 1.2

Private services excluding rents 0.5 0.6 0.4 0.5 0.5 0.5 0.5 0.8Rents 2.3 2.4 2.2 2.1 2.1 2.1 2.1 1.8Public services 1.3 1.5 1.1 1.1 1.0 1.3 1.0 1.0

Imported goods and services 0.1 –0.8 –0.0 3.2 3.6 4.1 5.6 5.3Excluding oil products –0.4 –0.8 0.1 0.3 0.3 0.5 1.6 1.8Oil products 2.4 –1.0 –0.8 17.1 19.9 22.2 26.6 23.3

National consumer price index and components Table 2.2Year-on-year change in percent

Sources: SFSO, SNB


3 Monetary developments

3.1 Interest rates and inflation expectationsAt its December 2007 monetary policy assess-

ment, the SNB decided to leave the target range forthe three-month Libor unchanged at 2.25–3.25%and to aim for the middle of the target range for thetime being. This decision was taken against thebackground of robust economic growth in Switzer-land, the continuation of which was uncertain,however, due to the turbulence on the internation-al financial markets.

After its December 2007 monetary policyassessment, the SNB left the one-week repo rate at2.05% for the present. Between mid-January andmid-February 2008, when the three-month Liborwas drifting down, the SNB increased the one-weekrepo rate steadily in order to keep the three-monthLibor more or less in the middle of the target range.Thereafter, it reduced the one-week repo rateagain, to a level of 2.15% in mid-March. In mid-March, the three-month Libor stood at 2.82% (cf. graph 3.1).

To help reduce the increased tensions on theinternational money markets, the Bank of Canada,Bank of England, ECB, Fed and SNB announcedcoordinated measures. The SNB took part in US dol-lar repo transactions, offering USD 4 billion of li-quidity on two occasions – 17 December 2007 and14 January 2008. Simultaneously, the SNB conclud-ed a mutual swap agreement (swap limit) with theUS Federal Reserve Bank. The repos were for 28 dayson each occasion, with value dates of 20 Decemberand 17 January respectively. All counterpartiesauthorised by the SNB who had a connection to theSwiss repo system were entitled to participate. Thedollar repo auctions were intended to give thesecounterparties easier access to US dollar liquidity.

Lower three-month Libor expectedThe market was anticipating a three-month

Libor rate of 2.9% for end-March at the time of theDecember monetary policy assessment, according to the regular Consensus Forecast survey. Betweenmid-December of last year and early February of thisyear, the interest rates for futures contracts matur-ing in June, September and December 2008 dippedwell below the three-month Libor spot rate. There-

Graph 3.2Three-month interest rate futures

Quarterly compounded rate in percent p.a.March June September December Spot Libor

%

2

2.5

3

3.5

F M A M J J A S O N D J 08 F

Graph 3.3Term structure of Swiss Confederation bonds

Years to maturity (hor. axis). Annually compounded nominaldiscount bond yield in percent p.a. (vert. axis)

end-Feb mid-Dec mid-Sep%

2

2.25

2.5

2.75

3

3.25

3.5

3.75

0 5 10 15 20 25 30

Graph 3.1Money market rates

Daily figures3M Libor SNB repo rate Target range

%

0

0.5

1

1.5

2

2.5

3

3.5

2004 2005 2006 2007 2008

Graph 3.1:Sources: Reuters, SNB

Graph 3.2:Sources: Bloomberg, SNB

Graph 3.3:Source: SNB


Graph 3.4Swiss Confederation bond yields

Monthly mean of annually compounded nominaldiscount bond yields in percent p.a.

2-year term 5-year term 10-year term15-year term 20-year term 25-year term

%

1

1.5

2

2.5

3

3.5

4

2004 2005 2006 2007 2008

Graph 3.5Spread of Swiss third-class industry bonds

Classified by the SNB. Smoothed spread over the SwissConfederation bond yields in basis points

2-year term 5-year term

30

40

50

60

70

80

90

100

110

F M A M J J A S O N D J 08 F

Graph 3.6International short-term interest rates (three months)

US Euro area UK Japan Switzerland

%

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008

Graphs 3.4, 3.5 and 3.6:Source: SNB

after they edged up again, and at end-Februarystood at 2.61%, 2.38% and 2.27% respectively (cf.graph 3.2). The market was therefore anticipating areduction in the target range by end-2008.

Slightly steeper yield curveBetween December 2007 and February 2008,

the increased flight into safer investments due tothe turbulence on the equity markets caused yieldsto fall, especially on bonds with maturities of 2–5years. This was reflected in a slightly steeper yieldcurve (cf. graphs 3.3 and 3.4). The average yield onfive-year Swiss Confederation bonds in Februarywas 2.51%; the corresponding yields on ten-yearbonds and twenty-year bonds were 2.96% and3.37% respectively.

Mortgage interest rates rose again slightly.This applied both to the interest rates for existingmortgages – which, under Swiss law, are the basisfor determining rents – and to the more flexiblerates for new mortgages. In mid-March the relevantcantonal bank rates were approximately 3.30% and 3.35% respectively. Over the same time-span,interest rates on savings deposits rose by rathermore, thus slightly reducing the interest spreadbetween existing mortgages and savings deposits,which is important for the traditional funding ofmortgage loans.

Credit spreads can be used to depict thechanges in borrowing terms for bond issuers. Theyrepresent the difference between the yields on can-tonal and corporate bonds and the yield on Confed-eration bonds, and can also be interpreted as credit risk premiums. Against the background of thefinancial market turbulence, credit risk premiumsfor bonds of all maturities have increased signifi-cantly since August 2007. Moreover, not only medi-um and low-grade borrowers but prime borrowershave also been affected. The risk of companiesbeing unable to service their bonds is considerablyhigher when economic activity is weakening thanin economic upswings. The larger credit risk premi-ums therefore point towards slower economicgrowth.


Declining interest rate differentialsbetween the dollar area and the euro areaon the money market…As opposed to Switzerland, short-term inter-

est rates in the US and the euro area declined afterthe previous monetary policy assessment in Decem-ber. The Fed cut its key interest rate by a total of125 basis points to 3.0%. Since the last monetarypolicy assessment, the three-month rate for dollardeposits had therefore fallen substantially by 212basis points to 2.85% in mid-March (cf. graph 3.6).The interest rate differential between three-monthdollar and Swiss franc deposits has been narrowingcontinuously since mid-2006. At mid-December, it stood at 218 basis points; by mid-March it was 3 basis points. The three-month rate for eurodeposits also eased between mid-December andmid-March, but by much less than for dollardeposits. The interest rate differential betweeneuro and Swiss franc deposits therefore narrowed by38 basis points and stood at 178 basis points inmid-March.

… and on the capital market The attractiveness of risk-free government

bonds also increased on foreign markets betweenDecember and February, and to a greater degreethan in Switzerland (cf. graph 3.7). Yields on ten-year US Treasury bonds averaged 3.74% in February,while ten-year German government bonds averaged3.84%. The differentials between foreign govern-ment bond yields and Swiss Confederation bondyields have been shrinking steadily since early2007. In February, this yield differential betweendollar and Swiss franc bonds averaged 0.8 percent-age points compared to 1.05 percentage points inDecember. The yield differential between euro andSwiss franc bonds narrowed over the same periodfrom 1.15 percentage points in December to anaverage of 0.9 percentage points in February.

Real interest rate remains slightly abovethe long-term averageGraph 3.8 shows movements in the one-year

real interest rate. This rate is defined as the differ-ence between the 12-month nominal interest rate

Graph 3.8Estimated real interest rate

Quarterly figures12 months ex ante

%

–0.5

0

0.5

1

1.5

2

2004 2005 2006 2007

Graph 3.7International interest rates

10-year government paperUS Germany UK Japan Switzerland

%

2

3

4

5

6

2004 2005 2006 2007 2008

Graph 3.9Survey on expected movements in prices

Quarterly figuresDecrease Unchanged Modest increase Strong increase

%

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007

Graph 3.7:Sources: SNB, Thomson Datastream

Graph 3.8:Source: SNB

Graph 3.9:Sources: SECO, SNB


and the expected rise in consumer prices over thisperiod; inflation expectations are taken as theaverage of the forecasts published by a number ofdifferent institutions (Consensus Forecast, February2008)1. The real interest rate measured in this waywas unchanged in the fourth quarter of 2007 ataround 1.8%. For the third time in succession, theone-year real interest rate was thus only slightlyabove its long-term average of 1.7%.

The survey of households carried out by SECOin January revealed that inflation expectationsremain high (cf. graph 3.9). Compared to the previ-ous quarter, however, the percentages of respon-dents who were expecting prices to fall, rise orremain the same were almost unchanged.

Graph 3.10Exchange rates

Daily figuresCHF/USD CHF/EUR (rhs)

1.05

1.1

1.15

1.2

1.25

1.3

J 07 F M A M J J A S O N D J 08 F

1.6

1.62

1.64

1.66

1.68

1.7

1.72

Source: SNB

3.2 Exchange rates

Stronger Swiss francThere has been a marked rise in the value of

the Swiss franc since the last monetary policyassessment in December (cf. graph 3.10). Betweenmid-December 2007 and mid-March 2008 it gainedapproximately 6% against the euro and in mid-March stood at 1.57 CHF/EUR. The appreciationagainst the euro was most marked between 27 December 2007 and 28 January 2008. The francappreciated against the dollar by approximately13% and was trading at 1.01 CHF/USD in mid-March. The dollar/euro exchange rate was highlyvolatile again, hitting several new highs. In mid-March it stood at 1.55 USD/EUR.

The Swiss franc had been steadily losingvalue against the euro since the beginning of2006. This trend was broken in October 2007. Thefranc was relatively stable against the dollarbetween early 2004 and early 2007. Then it beganto strengthen – only slightly at first but then, afterthe summer of 2007, at an increasingly rapid pace.The weaker dollar is consistent with the sharpreduction in US growth prospects and a narrowingof interest rate differentials. Some of the recentappreciation of the Swiss franc against the dollarand the euro is also an expression of the increaseduncertainty on the financial markets (cf. QuarterlyBulletin 3/2007, p. 32).

1 Cf. table 1.1.


Graph 3.11Export-weighted real exchange rate of Swiss franc

January 1973 = 10024 countries Euro area

Index

130

140

150

2004 2005 2006 2007 2008

Source: SNB

Graph 3.12MCI nominal

Daily figuresMCI 3:1

–0.5

0

0.5

1

1.5

2

Sep Oct Nov Dec Jan 08 Feb

Source: SNB

Rise in the real external value of the franc The recent movements in nominal exchange

rates are also reflected in the trade-weighted realexchange rate of the Swiss franc, which factors indifferences in price movements between currencyareas. The euro area accounts for 60% of Swissexports, while the US absorbs 15% and the bulk ofthe remaining 25% is taken by Asia, i.e. a region inwhich many currencies are linked to the dollar.Between December 2007 and February 2008, theSwiss franc appreciated against the euro area by2.9% in real terms, after trending downwards sincemid-2004. Against Switzerland’s 24 largest tradingpartners, the real external value of the franc rose byeven more – almost 3.2%.

More restrictive monetary conditions The substantial appreciation of the Swiss franc

since the December monetary policy assessment,accompanied by an unchanged short-term interestrate, resulted in a marked tightening of monetaryconditions, as shown by the Monetary ConditionsIndex (MCI) in graph 3.12. The MCI combines thethree-month Libor and the trade-weighted nominalexternal value of the Swiss franc, providing a meas-ure of the monetary conditions with which busi-nesses in Switzerland have to contend. The MCI isreset to zero immediately after each monetary pol-icy assessment. An increase to positive values(decline to negative values) thus signifies a tight-ening (loosening) of monetary conditions (cf. box,‘The Monetary Conditions Index’, Quarterly Bulletin,1/2004, p. 27). At the end of February, the MCIstood at 156 basis points. Measured by the histori-cal changes in the index, a rise of more than 1.5percentage points is high.


deteriorated. The S&P 500 in the US and theEuroStoxx 50 in Europe lost 11% and 18% respec-tively between mid-December and mid-March. InSwitzerland, the Swiss Performance Index (SPI)slipped by 16% over the same period. The SPI correc-tion amounted to 10.5% in January 2008 alone. Thismonthly loss marked the worst January since theintroduction of the SPI in 1987 and its ninth-worstmonthly performance overall. The sector breakdownshows that it was bank shares, in particular, thatwere the most seriously affected (cf. graph 3.14).Between mid-December and mid-March, they lostaround 45% of their value, with the prices of large-cap international banks suffering the most, due tosome heavy write-downs and downward revisions toearnings and dividend forecasts. The economic con-cerns triggered by the sub-prime crisis also impactedon other sectors. The Swiss technology sector, inparticular, recorded a substantial decline (–36%).

Graph 3.15 shows the expected volatility forthe next thirty days based on the Chicago BoardOptions Exchange Volatility Index (VIX) and theactual volatility measured as the annualised stan-dard deviation of monthly yields on the SPI and S&P500. Volatility, which is a sign of uncertainty, goeshand in hand with equity market corrections. Thereis, therefore, a correlation between the sharp swingsin volatility and the share price falls of August andNovember 2007 and late January 2008.

Graph 3.13Stock prices

Beginning of period = 100SPI S&P 500 Euro-Stoxx 50 Nikkei 225 FTSE 100

Index

100

120

140

160

180

200

2004 2005 2006 2007 2008

Sources: Bloomberg, Thomson Datastream

Graph 3.14Selected SPI sectors

Beginning of period = 100Banks Industry Construction Technology

Index

60

80

100

120

140

160

J 07 F M A M J J A S O N D J 08 F

Source: Thomson Datastream

3.3 Equity, commodity and real estate pricesEquities, commodities and real estate are

investment assets. Their prices are pertinent to anyanalysis of the economic situation for two main rea-sons. Firstly, price fluctuations on these marketstrigger changes in corporate and household wealth,which in turn has repercussions for their creditstanding and for their consumption and investmentbehaviour. Secondly, changes in inflation expecta-tions lead to equities, real estate and commoditiesbeing revalued. Price movements in these invest-ment assets therefore allow conclusions to be drawnabout inflation expectations. Commodities are alsoof interest for a third reason: They are inputs in theproduction process of many goods. Consequently,their prices affect costs and may thus exert pressureon the general price level.

Large price falls and high volatility on the equity marketsThe international equity markets have suffered

further losses since mid-December 2007 (cf. graph3.13). There are two main reasons for the slump inshare prices. Firstly, the equity markets have beenadversely affected by the sub-prime crisis and theuncertainty as to its full extent. Secondly, the eco-nomic environment in the US and other countries has


Higher commodity prices Commodity prices continued to advance.

Boosted by a number of factors, including the ris-ing prices of base and precious metals and agricul-tural products, the Goldman Sachs CommodityIndex gained almost 19% between the mid-Decem-ber 2007 monetary policy assessment and mid-March. The price of gold reached a new all-timehigh. This performance could be due in part to theweakness of the dollar and the search for safeinvestments that might offer protection from infla-tion.

The prices for energy products were on the riseagain, although they were subject to relativelylarge fluctuations. The price of oil hit new highs inearly January 2008, slipped back quite substantial-ly towards the end of January and again reached anew record high in late February. At mid-March, theoil price stood at 107 dollars per barrel.

Moderate price pressure continues on the real estate market Prices on the housing market continued to rise

moderately in real terms (i.e. relative to the CPI) inthe fourth quarter of 2007 (cf. graph 3.16). Thebiggest increase was in the prices of owner-occupiedapartments (0.7%), while prices of single-familyhomes remained flat. Year-on-year, apartment rents,which make up the largest segment of the Swisshousing market and are also the largest componentof the CPI (around 20%), rose by 0.4% in real terms,i.e. by much less than in the previous quarter(2.0%). This figure relates largely to the existinghousing stock. Rents for first lettings, which are abetter reflection of market forces, actually fell, los-ing 1.6%. Rents for business property also fell (cf.graph 3.17): Not only did office rents continue theirdecline (–1.4%) but commercial rents fell for thefirst time in five quarters (–3.0%).

Graph 3.15Volatility of equity returns

SPI S&P 500 VIX

%

5

10

15

20

25

30

35

2005 2006 2007 2008

Graph 3.16Real estate prices and rents

Year-on-year change, in real termsRents Rents (new apts.)Single-fam. home prices Owner-occ. apt. prices

%

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007

Graph 3.17Real industry and office rents

Year-on-year change, in real termsRents (commercial) Rents (office)

%

–7.5

–5

–2.5

0

2.5

5

7.5

10

2000 2001 2002 2003 2004 2005 2006 2007

Graph 3.15:Sources: SNB, Thomson Datastream

Graph 3.16:Source: Wüest & Partner

Graph 3.17:Source: Wüest & Partner


3.4 Monetary aggregates

M1 and M2 still declining As shown in graph 3.18, both M1 (notes and

coins in circulation, sight deposits and transactionaccounts) and M2 (M1 plus savings deposits) havebeen declining since early 2006 and still remain ata low level. In February 2008, M1 (–4.2%) and M2(–6.6%) were lower than a year earlier. On theother hand, M3 (M2 plus time deposits) continuedto grow slightly in February (+1.4%). While the M1and M2 monetary aggregates had been fluctuatingat a high level from 2003 to 2005, they fell onceinterest rates began to rise.

One way of assessing potential inflationaryrisks emanating from an excessive supply of liquid-ity to the economy is to calculate the monetaryoverhang. This corresponds to the positive or neg-ative deviation of actual M3 from an equilibriumvalue which is calculated on the basis of the trans-action volume in the economy and the opportunitycost of holding money (cf. box, ‘Money supplygrowth and inflation’, Quarterly Bulletin 1/2005, p. 33). In order to take account of statistical uncer-tainty, the monetary overhang is presented ingraph 3.19 as a range that spans one standard devi-

Graph 3.18Monetary aggregates

Monthly figures, seasonally adjustedM1 M2 M3

In CHF billions

200

300

400

500

600

700

90 95 00 05

Source: SNB

ation. If the range is below the zero line – as wasthe case in the fourth quarter 2007 for the secondtime in succession – this indicator points towardslower inflation pressure in the medium term.

2006 2007 2006 2007 2008

Q4 Q1 Q2 Q3 Q4 December January February

Monetary base2 43.1 44.2 43.6 44.6 44.0 43.4 44.8 46.8 46.4 45.0Change3 3.0 2.5 2.2 3.1 1.5 2.7 2.7 2.8 2.8 1.8

M12 282.4 269.1 281.0 276.0 270.0 261.5 269.1 271.7 267.8 267.4Change3 –0.6 –4.7 –3.4 –3.6 –4.2 –6.7 –4.3 –2.4 –4.1 –4.2

M22 481.6 450.6 474.1 465.9 453.9 439.0 443.6 445.8 440.6 438.8Change3 –2.0 –6.4 –4.7 –5.3 –6.1 –8.0 –6.4 –5.2 –6.5 –6.6

M32 600.3 612.3 607.9 613.4 611.6 606.4 617.8 622.8 622.5 624.1Change3 2.5 2.0 2.0 3.0 2.4 1.0 1.6 2.0 1.2 1.4

Monetary aggregates1 Table 3.1

1 1995 definition2 Level in CHF billions3 Year-on-year change in percentSource: SNB


Graph 3.19Money gap and annual inflation rate

Percentage deviation from equilibrium (lhs)ECM money gap min. ECM money gap max. Annual inflation rate (rhs)

%

–10

–5

0

5

10

15

20

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

–4

–2

0

2

4

6

8

Source: SNB


2006 2007 2006 2007 2008

Q4 Q1 Q2 Q3 Q4 November November January

Total1 4.8 5.8 5.1 5.2 5.3 5.5 6.9 7.4 7.4 7.0Households2 6.1 4.6 5.9 5.1 5.0 4.4 4.0 4.5 3.1 3.5Companies2 1.6 6.7 3.4 3.9 4.5 6.6 11.6 11.3 15.8 13.9Mortgage claims1 4.8 4.0 4.5 4.2 4.2 3.8 3.9 4.2 3.8 3.8

of which households2 5.5 4.3 5.3 4.9 4.8 4.0 3.7 3.6 3.6 3.6of which companies2 1.2 2.3 0.7 0.8 1.2 3.0 4.3 5.3 4.1 4.0

Other loans1 4.6 13.4 8.1 9.6 10.3 13.1 20.2 21.4 23.6 21.0of which secured1 2.5 8.2 1.5 7.1 7.2 5.6 12.8 18.9 10.3 –0.8of which unsecured1 6.3 17.2 13.4 11.5 12.6 18.6 25.5 23.2 33.2 38.2

Bank loans Table 3.2Year-on-year change in percent

1 Monthly balance sheets2 Credit volume statisticsSource: SNB

Source: SNB

Graph 3.20Bank loans

Monthly figuresTotal Mortgage claims Other loans (rhs)

In CHF billions In CHF billions

650

675

700

725

750

775

800

825

850

J 07 F M A M J J A S O N D J 08

140

145

150

155

160

165

170

175

180

3.5 Credit

Mixed credit signals Credit growth accelerated in the fourth quar-

ter of 2007 to 6.9% year-on-year. The quarterbefore, it was 5.5%. This growth is due to increasedcorporate lending (+11.6%), whereas growth inlending to households was once again moderate(+4.0%).

Table 3.2 provides figures on lending by typeof use. The change in ‘Other loans‘ – which mainlycomprise borrowing by companies – rose markedlytowards the end of the year, advancing from 13.1%year-on-year in the third quarter to 20.2% in thefourth quarter. Unsecured loans (25.5%) were themain driver. Mortgages, most of which are taken outby households, were up 3.9% in the fourth quarter– virtually the same as in the previous quarter.

Graph 3.20 depicts the levels of total loans,mortgage loans and other loans. At the current mar-gin it can be seen that these loans have stabilisedat a high level.


4 The SNB inflation forecast

Monetary policy impacts on output and priceswith a considerable time lag. In Switzerland, mon-etary policy stimuli have their maximum effect oninflation after a period of approximately threeyears. For that reason, the SNB’s monetary policy isguided not by current inflation, but by the inflationrate that could be expected in two to three years ifmonetary policy were to remain unchanged. Theinflation forecast is one of the three key elementsof the SNB’s monetary policy strategy, togetherwith its definition of price stability and the targetcorridor for the three-month Libor.

4.1 Assumptions for global economic developments

The SNB’s inflation forecasts are largelyembedded in an international economic scenario.This represents what the SNB considers to be themost likely path of the international economy overthe next three years. Table 4.1 shows the mainexogenous assumptions for March together with thecorresponding assumptions underlying the Decem-ber forecast.

Lower growth momentum due to financialmarket turbulenceBecause of the continuing turbulence on the

US real estate market and the international finan-cial markets, a markedly lower growth rate isexpected in the US in 2008 and 2009 than wasassumed for the December forecast. The risks of amedium-term slowdown in growth have alsoincreased in Europe. For that reason, the latestforecast for 2008 has also been revised downwardscompared to the December monetary policy assess-ment. In both economic areas, growth is stillexpected to trend towards the potential of approxi-mately 3% (US) and 2% (EU) towards the end of theforecast period.

The latest scenario assumes an oil price ofaround USD 98 per barrel for the next few quartersand USD 92 in the long term. Internationally, higherinflation rates are forecast for 2008 and 2009, dueto higher energy and commodity prices. The dol-lar/euro exchange rate has been increased slightlyto 1.47 USD/EUR in the latest scenario for 2008 and2009.


The SNB has a statutory mandate to ensureprice stability while at the same time taking dueaccount of economic developments.

The SNB has specified the way in which itexercises this mandate in a three-part monetarypolicy strategy. First, it regards prices as stablewhen the national consumer price index (CPI) risesby less than 2% per annum. This allows it to takeaccount of the fact that the CPI slightly overstatesactual inflation. At the same time, it allows infla-tion to fluctuate somewhat within the economiccycle. Second, the SNB summarises its assessment

of the situation and of the need for monetary pol-icy action in a quarterly inflation forecast. Thisforecast, which is based on the assumption of aconstant short-term interest rate, shows how theSNB expects the CPI to move over the next threeyears. Third, the SNB sets its operational goal inthe form of a target range for three-month Swissfranc Libor. The target range provides the SNB witha certain amount of leeway, enabling it to react tounexpected developments in the money and for-eign exchange markets without having to changeits basic monetary policy course.

Inflation forecasting as part of the monetary policy strategy

Inflation forecast of March 2008 2008 2009 2010

BIP USA1 1.5 2.4 3.1BIP EU-151 1.7 2.0 2.4

Short Long term term

Exchange rate USD/EUR2 1.47 1.47Oil price in USD/barrel2 98.3 92.0

Inflation forecast of December 2007 2007 2008 2009

BIP USA1 2.1 2.4 2.8BIP EU-151 2.7 2.0 2.0

Short Long term term

Exchange rate USD/EUR2 1.42 1.42 Oil price in USD/barrel2 94.0 82.0

Assumptions for inflation forecasts Table 4.1

1 Change in percent2 LevelSource: SNB

Graph 4.1SNB inflation forecasts: a comparison

CPI: year-on-year changeMar (2.75%) Dec (2.75%) Sep (2.75%) Inflation

%

0.5

1

1.5

2

2.5

2007 2008 2009 2010

4.2 Inflation forecast for Q1 2008 to Q4 2010 The quarterly inflation forecast is derived from

the analysis of different indicators, model estimatesand the assessment of any special factors. It mapsthe future development of prices on the assumptionthat the three-month Libor will remain constantover the forecasting period. Graph 4.1 depicts theinflation forecast of March 2008 alongside those ofDecember and September 2007. The new forecast,which covers the period from the first quarter of2008 to the fourth quarter of 2010, is based on asteady three-month Libor of 2.75%. This rate corres-ponds to the mid-point of the 2.25–3.25% targetrange for the three-month Libor, which the SNB con-firmed on 13 March. The December and Septemberinflation forecasts were also based on a fixed three-month Libor of 2.75%.

The Swiss economy continues to grow at a verybrisk pace. However, the expected slowdown inglobal economic growth will impact on the Swisseconomy as well and result in a medium-term reduc-tion in the pressure of demand. In the short term,forecast inflationary pressure has risen, as com-pared to the inflation forecast of December. This isdue, first, to strong demand in the markets for

goods, services and labour and to the fact thatprices are rising across a broad front for oil, rawmaterials and agricultural products. Second, it isrelatively easy to pass on costs in view of strongdemand and the high utilisation of productioncapacity. Finally, higher inflationary pressure alsoreflects the delayed effects of the weakness of theSwiss franc in 2007. For these reasons, inflation willbe situated slightly above 2% until the third quarterof 2008, and then fall again towards the end of theyear. The medium-term inflation outlook hasimproved. This is due to the fact that the slowdownin Swiss growth is greater than the SNB hadassumed in December. Assuming an unchangedthree-month Libor of 2.75%, the SNB forecasts aver-age inflation of 2% in 2008, and 1.4% in the twofollowing years.

This assessment of the inflation outlookinvolves considerable uncertainty. For instance,should the price of oil increase further, the inflationforecast would deteriorate in the short term. Thereis also a risk that inflation expectations will becomeentrenched and will work against a decline in infla-tion. At the same time, there is a danger that theeconomy will weaken even more than expected. Inthis event, the medium-term inflation forecastwould have to be adjusted downward.


Source: SNB

The economic situation from the vantage point of the delegates for regional economic relations

Summary report for the attention of the Governing Board of the SwissNational Bank for its quarterly assessment of March 2008

The Swiss National Bank’s delegates for regional economic relations areconstantly in touch with a large number of enterprises from the differentindustries and economic sectors. Their reports, which contain the subjectiveevaluations of these companies, are an important additional source ofinformation for assessing the economic situation. On the following pages,the most important results of the talks held from December 2007 to February 2008 on the current and future economic situation are summarised.



Summary

Most of the 170 or so representatives of vari-ous economic sectors and industries interviewed bythe SNB delegates for regional economic relationsbetween December and February reported goodbusiness activity. The industrial sector and con-sumer-related industries such as retail and tourismperformed particularly well. By contrast, respond-ents from the banking sector, who have been con-siderably affected by the stock market slump, gavea more cautious assessment.

The prevailing outlook for the next few quar-ters is optimistic. Given the high level of capacityutilisation, the current year should again see somesignificant investment. In contrast to the autumn2007 round of talks, however, financial market tur-bulence and the uncertainty this is causing put adampener on sentiment, thus nipping any euphoriamore or less in the bud. Nevertheless, both banksand companies refuted any suggestion of a tighten-ing in lending conditions. On the other hand, risingprices for energy, industrial raw materials and agri-cultural products, coupled with the weak dollar,proved to be a major burden. Recruitment of per-sonnel also continues to pose a problem.


1 Production

ManufacturingAfter what was, for the most part, a very suc-

cessful 2007, the majority of manufacturing com-panies got off to a good start in 2008 and weregenerally able to reach or even exceed their targets.However, sales growth targets for 2008 are mainlylower than the figures from the previous year. Out-standing orders remained at a very high level and,in many cases, are set to extend through the firsthalf of the year. The EU, eastern Europe (Russia)and Asia (China) continued to be the most import-ant drivers of demand. Nevertheless, a number ofcompanies reported a sharp decline in demand fromthe US. This was especially the case for suppliers tothe US automobile and construction industry,although companies in other sectors have not (yet)experienced much of a slowdown. Markets arebroad-based in geographic terms, meaning thathigher sales in other regions frequently helped tooffset US losses. Utilisation of technical capacityand staffing levels remained very high in most sec-tors, thus again resulting in production delays andextended delivery periods. Procurement of rawmaterials is still a problem, although the situationdoes seem to have eased somewhat.

The healthy economic climate extended acrossalmost all industries. High levels of investmentworldwide in the relatively non-cyclical areas ofelectricity and transport had an especially stimu-lating effect, as did increased efforts to consumeenergy and raw materials more efficiently. However,a large number of respondents expected orderintake to level off during the course of the year,even though clear indicators pointing in this direc-tion are still few and far between. In many cases,respondents saw this as part of a process of theeconomy ‘returning to normal’ – which, in view ofthe continued signs of overheating, was somethingto be welcomed.

ServicesRepresentatives from consumer-related ser-

vice sectors again expressed a great deal of satis-faction at the way business has performed. Afterwhat was by and large a gratifying Christmas sea-son, retailers reported good sales results for Janu-ary and February and continued free-spending onthe part of consumers. This applies both to whole-salers and to smaller retailers. Nevertheless, somerespondents offered a somewhat more circumspect

outlook for the rest of 2008 and reduced their salestargets accordingly. Car dealers are currently onesuch retail group with this mindset. Up to now,signs of a drop in expectations have been particu-larly evident in the medium price bracket, but lessso in the high-price and luxury segments. Retailersin Switzerland’s border regions continued to bene-fit from the exchange rate-induced decline in cross-border shopping by Swiss residents.

Respondents from the various tourism sectorsalso painted a positive picture. The winter seasongenerated record results in some areas, thanks tofavourable snow and weather conditions and a con-siderable willingness to spend on the part oftourists. Most respondents were optimistic asregards future prospects. The numbers of bothdomestic holidaymakers and tourists from the EU,Asia and eastern Europe are extremely encouraging,so that the drop in visitors from the US has pro-bably been compensated. Swiss cities also benefit-ed from the continuing strong demand relating tobusiness events and conferences. Having said this,some parts of the banking sector were reportingcancellations.

The outlook among representatives from thecompany-related services segment was more mixed.Whereas respondents from the IT industry wereupbeat, transport and logistics companies reporteda drop in cross-border transactions. Higher trans-portation costs are also having a tempering effect.A number of management consultants, whoseclients include banks, have also expressed misgiv-ings.

Given the financial market turbulence andweak stock market, banks were less optimistic asregards the business climate than they were a fewmonths ago. This rather more downbeat view wasespecially noticeable among service providers oper-ating mainly in the wealth management segment,whose clients’ custody account assets have con-tracted. Customers are also less inclined to performbanking transactions. Consequently, many of therespondents surveyed expected a decline in com-mission income compared to the prior-year level.The lending business continued to perform well,though margins remain under pressure. In view ofthe slowdown in the residential construction sector,banks are expecting a deceleration in mortgage vol-ume growth. Corporate lending remained robust,with banks continuing to take a favourable view oftheir clients’ financial circumstances. They rejectedany suggestion that they had tightened their lend-


ing conditions, and this was confirmed in discus-sions with business representatives. However, thereis some trepidation among a number of companiesat the prospect of having to renew their respectiveloans.

Construction and real estateConstruction industry representatives were

again encouraged by economic conditions, despitemost reporting a downturn in new residential build-ing. In many cases, a high order backlog guaranteescontinued activity well into 2008. Commercial andindustrial construction and, to a certain extent,major public building projects are helping to pro-vide positive impetus. The verdict was also positiveamong respondents from the construction-relatedindustries, which are benefiting greatly from a highlevel of renovation activity and improvements inenergy technology. Opinions are still divided on theoutlook for the real estate market. Price increases –most notably in the top price bracket – seem to besubsiding in some regions. This is attributable toan increase in the availability of residential proper-ty and to heightened price sensitivity, mainly onthe part of potential buyers from abroad. In otherregions, strong demand and rising real estate pricescontinue to be norm.

2 Labour market

While a number of respondents have indicatedtheir intention to further expand their workforcethis year, the demand for additional labour seemsless urgent compared to the previous year. Tempor-ary employment is being used increasingly as ameans of covering personnel requirements. Therecruitment of qualified staff is still proving to be adifficult and cost-intensive process – a problemwhich applies to the labour markets both inSwitzerland and abroad. Fluctuation rates alsoremained at a high level. The wage increases imple-mented by most respondents were more substantialthan in the prior-year period. Almost all companiesreported a rise in wage pressure – a situation whichonly gave cause for concern in exceptional cases,however.

3 Prices, margins and earnings situationRising prices for energy, raw materials and

agricultural products were a considerable worry.Scope for price adjustments in the industrial sectorhas increased during the economic upswing of thepast few years. However, fierce price competitioncontinues to dominate many areas, and this oftenprevents the full cost of inflation from beingpassed on to customers. Companies are thereforecontinually seeking to increase productivity inorder to maintain margins. At the beginning of theyear, wholesalers upped the prices of numerousbasic foodstuffs such as bread, flour and milk prod-ucts, thereby passing on at least some of the high-er procurement costs for corn and milk. Customersapparently accepted these price hikes without com-plaint. Nevertheless, in view of the consistentlytough competition, representatives from the retailsector are still envisaging downward pressure onprices.

As a result of the weak dollar, many exportersare seeing their margins shrink drastically. Priceincreases in the US currency only tend to work inexceptional situations, and companies that chargein Swiss francs are often forced to make price con-cessions. In some parts of the Asian dollar area,invoicing in euros is being increasingly encour-aged. In contrast, exporters expressed continuedsatisfaction with the euro exchange rate. Althoughthe euro, which was still strong, pushed up theprice of numerous goods from the EU area, the con-sumer goods sector in particular was able to passon the cost of these hikes.


Small and medium-sized exporters:Challenges when developing new markets

Thomas Kübler, delegate for regional economic relations


1 Swiss economy benefits fromglobalisationSwitzerland is one of the world’s most glo-

balised economies.1 This finding is not new. As asmall, open economy with few raw materials,Switzerland opened up its economy at a very earlystage, enhancing its wealth through extensive inte-gration into a global economy characterised by thedivision of labour.2 The Swiss efforts meant anintensive development of export markets. Integra-tion in the world economy also included opening upthe domestic market for imports and participatingin the global division of labour by fragmenting theadded-value chain and locating individual process-es in places where the best opportunities lay.

In October 2007, the Swiss National Bankdelegates for regional economic relations surveyed55 small and medium-sized Swiss exporters. Theirobjective was to try and ascertain why and howwell the companies were integrated in the globaleconomy, how they went about this, and the conse-quences for Switzerland as a business location. Themost important findings from the survey were asfollows:

• In the past few years, the integration of the Swisseconomy within the global economy has proceed-ed steadily. In general, exports shipped by thecompanies surveyed are increasing faster thandomestic sales; more and more, global sourcing isreplacing in-house or local sourcing, and off-shoring is moving forward.

• Exporters’ target markets are rapidly shifting fromwestern European countries towards easternEurope and Asia. Most companies are developingnew markets on their own initiative. They aredoing so step-by-step with the aid of existingnetworks – or their own networks – without anygovernment support. In general, this develop-ment is funded from their own resources.

• The increasing importance of exports is attribut-able to the dynamic growth in these markets, cus-tomer relocations and the expansion of marketpotential. Due to higher sales volumes,economies of scale can be achieved or the criticalthreshold attained at which an investment is paidoff.

Clearly, Swiss companies are benefiting fromthe vitality of exports. But does this hold for theSwiss economy as a whole? Or is integration –ultimately – causing parts of companies to be off-shored, with the substitution of in-house or domes-tic sourcing by imports? The findings obtained fromthe survey were as follows:

• 70% of the companies surveyed have offshoredindividual corporate functions or businessprocesses. The decisive factor in favour of off-shoring in most cases was customer closeness(’follow the customer’). However, increasing costpressures were also mentioned.

• Mainly, the activities that were offshored werelabour-intensive processes in which the Swisslocation did not enjoy a comparative advantage.Most of the companies surveyed stated that theirhome location benefited from this decision sinceit often triggered additional investments at theparent company in order to increase labour pro-ductivity.

• Thus, foreign investment is, in many cases, com-plementary to equipment investment in the homemarket. The aim is to retain processes requiring agreat deal of expertise at the home location.However, the pressure to relocate even moderntechnologies and high value-added processes isincreasing.

Is it still possible to supply labour-intensiveinputs in Switzerland, in view of this increasingconcentration on high value-added, expertise-oriented processes? The findings of the survey wereas follows:

• The share of imports is rising at about half of thecompanies surveyed. Moreover, procurement mar-kets are increasingly shifting from regions justacross the border to eastern Europe, Asia and, insome cases, Latin America.

• Increased imports are being triggered by lowerprices for the imported inputs as well as the factthat, often, the inputs are not (or no longer)manufactured in Switzerland.

• According to the respondents, the importedgoods are seldom re-exported without a “large”amount of added value.

1 Globalisation index of the Swiss Institute for Business CycleResearch at the Federal Institute of Technology (KOF) 20082 SECO, Strategische Ausrichtung der Schweizerischen Aussen-wirtschaftspolitik, p. 5, Berne 2005


It may be concluded from the survey that theSwiss economy is benefiting from the increasingintegration of companies in the global economy, aswell as the growing internationalisation and global-isation of added-value chains. The vast majority ofthe companies surveyed stated that they had expe-rienced growth in added value, an increase inemployment and a rise in productivity at their Swisslocation, despite the offshoring of individualprocesses.3

2 Detailed results of the survey

2.1 Strong export performanceThe vast majority of survey participants

(about 70%) stated that they were growing fasteror much faster in the export sector than on thedomestic market. Companies with very high exportratios were predominant among those who reportedno difference – or very little difference – betweendomestic and foreign sales figures.

0f the experts surveyed, 18 (about 32%) men-tioned the fact that the structure of (or changes tothe) institutional framework had promoted marketentry. The Bilateral Treaties were mentioned repeat-edly, and the freedom of movement of labour, inparticular, was singled out. Above all, mentionshould be made of the improvements and simplifi-cations in access to the European labour market,and the easier recruitment conditions in Switzer-land that have resulted. The simplified cross-borderemployee transfers within corporate groups are alsostressed, notably the increased flexibility in theinternationalisation of corporate structures thatcan be achieved in this manner. In addition,respondents were positive about both the expan-sion of the EU into eastern Europe and the simpli-fied access to new sales and procurement marketsthat has resulted as well as about the improve-ments brought about within the context of theWTO.

Graph 1

Source: SNB survey, October 2007

3 This corroborates a number of studies on this topic. Cf. Girma /Greenaway / Kneller, Does exporting lead to better performance?, Uni-versity of Nottingham, 2002, or Robert Jäckle, ‘Going multinational:What are the effects on home market performance?,’ Deutsche Bundes-bank, Discussion Paper Series 1: Economic Studies no. 03/ 2006;Sascha O. Becker, Marc-Andres Mündler, ‘The effect of FDI on job sepa-ration,’ Deutsche Bundesbank, Discussion Paper Series 1: Economic

Studies no. 01/ 2007, or Spyros Arvanitis and Heinz Holenstein,‘Determinants of Swiss Firms R&D Activities at Foreign Locations,’ KOF Working Papers no. 127, 2006.

Added value increasedAdded value decreased

Employment increasedEmployment decreased

Productivity increasedProductivity decreased

0

10

20

30

40

50

60

Net effects of integration

Number of mentions


Survey method and data sampleSurvey methodThe company survey was conducted in the

form of personal interviews using a questionnaire.Companies were chosen selectively with the aim ofachieving a data sample that would provide in-depth information about export activities, off-shoring and global sourcing. Consequently, the sur-vey is not representative but rather a survey ofexperts.

Structure of the data sampleIn terms of its arithmetic mean (sales: CHF

340 million; staff: 990), the sample is skewedtowards companies that are of above-average size.However, if we take the median value, we obtainfigures (sales: CHF 120 million; staff: 354) that aretypical for a Swiss small to medium-sized company.At about 70%, the proportion of exports exceedsthe overall average for the economy (about 50%)by a considerable margin. However, if we bear inmind that the figure for the overall economy alsoincludes public administration and other servicesprovided solely for the domestic economy, we canassume that the sample adequately covers theSwiss export industry.

The vast majority of companies surveyed pur-sue a global export strategy rather than exportingto a single economic region. The EU remains themost important sales market. Western Europe, theUS and Japan, say the majority of respondents,have ’always’ been targeted, but eastern Europe andthe rest of Asia did not come onto their radarscreens until the end of the 1990s or the beginningof the 2000s. However, the significance of theseregions is now growing rapidly.

2.2 Market access, distribution structures, motives and risk managementWhen small and medium-sized companies make

their first ventures into new export markets, theyoften encounter challenges they had not confrontedbefore. Even the task of obtaining information ormonitoring the market poses difficulties for com-panies which – because of their size – do not havethe requisite specialists. Additional challenges canbe summed up as follows: market practices, purchas-ing power, preferences, the competitive environ-ment, the operating environment provided by thestate, financing arrangements, etc. A range of ques-tions also arise when entering new markets: Whatform should the market entry take? How can distri-bution structures be established? How can marketentry be financed? Finally, the question of theexchange rate risk comes up again – or to a greaterextent than previously.

Market entry. The survey reveals that marketentry is primarily self-directed. If need be, com-panies are supported by their own business partnersor networks (existing customer or supplier relation-ships). For larger companies, or in the case of groupcompanies, other group units serve as steppingstones for the entry into new markets. We see that,while business partners or networks hold a dominantposition with over 70% of mentions, little mention ismade of Swiss government organisations such asOSEC or Swiss embassies (15%), or support by state-backed institutions in the target region (10%).

Graph 2


EU Rest of Europe US Asia

0

10

20

30

40

50

60

Geographic distribution

Number of mentions


Distribution structures. Over time, and alsowith respect to the level of market penetration,changes in distribution structures may be observed.Typically, agents (30%) or company representatives(20%) are used in the initial phase. Not until thecompany is established in the market are distribu-tion units established. However, these rapidlybecome very important (35%). A fairly major pro-portion of export products is accounted for byplants and systems, while ’the simple sale of prod-ucts across the border’ is less important and is sub-ject to significant offshoring pressure. Consequent-ly, the importance of service and engineeringpositions abroad is increasing. Internet sales are ofsecondary importance only. Although e-businesswould render on-site physical presence unnecessary– at least as far as sales (and possibly also distribu-tion) are concerned – it is almost never used sys-tematically.

Motives. The main motives for commencing orstepping up export activity are as follows:

• 34% of the companies surveyed state that theywish to expand their sales and market area inorder to increase output and achieve economiesof scale. They are clearly aiming for lower unitcosts.

• Slightly more than 20% of respondents earn high-er margins abroad. They specialise in niche prod-ucts and most of them manufacture machinery orsystems without strong competition on the mar-ket, or where the competition's product is not

readily comparable to theirs. Here, the pricingpower is with the producer.

• About 45% of respondents cited other motives,these being mostly ’market’, ’market dynamics’and ’follow the customer’. The latter is a majordriver, particularly for subcontractors. Anothermotive mentioned is that the Swiss market isclose to saturation, while demand in the newgrowth markets of eastern Europe and Asia is live-ly.

• High-tech companies refer to the fact that sig-nificant changes in materials or production tech-nology demand major investment in equipment ifthe company is to hold its position at the fore-front of technological progress. Yet the requisitehigh level of capital commitment cannot be refi-nanced in the limited home market. In thisrespect, absolute market size (rather than marketdynamics, or arguments relating to saturation oroffshoring) is the decisive factor.

• Finally, export markets are also chosen quite con-sciously in order to diversify political risks as wellas risks relating to business cycles.

Comparison of prices in domestic andexport markets. The question regarding relativeprices in domestic and export markets producedinteresting results. 16 respondents (30%) statedthat prices were higher abroad, while 16 said theopposite. 21 respondents (40%) thought there wasno difference in prices. Companies with a particu-larly strong and valuable brand and companies rely-ing on the ’swissness’ label due to the nature oftheir products often judged export prices to behigher. Companies that claimed they could achievehigher margins and prices abroad said that thevalue-added in export products was higher than itwas in products sold on the domestic market. It wasonly because of this that the effort involved in sell-ing to foreign markets was worthwhile, they said.Respondents operating in an environment in whichprices in domestic and export markets were compa-rable put forward exactly the opposite argument.Most of them sell products, rather than systems.Moreover, their products and those of their com-petitors are largely standardised and can be easilyinterchanged. Consequently, there is little scope forprice differentiation from one national market toanother, and prices are generally set as a reactionto competitors’ prices.4

Graph 3


Foreign prices higherForeign prices the same

Foreign prices lower

0

5

10

15

20

25

Export mkt prices compared to domestic mkt prices

Number of mentions

4 Cf. Andreas M. Fischer, Matthias Lutz, Manuel Wälti, 'Who priceslocally? Survey of evidence of Swiss exporters,' Centre for EconomicPolicy Research, Discussion Paper Series no. 6442, 2007.


Financing and exchange rates – exporters’risk managementThe majority of the companies surveyed

finance their exports (establishing structures; day-to-day operations) from their own resources. This isdue to the fundamental endeavour on the part ofmany companies to maintain a high equity ratio inorder to secure their financial independence. Anadditional factor with regard to commitmentsabroad, they stress, is that domestic banks are verycautious as their organisations abroad are notextensive enough to provide adequate local cus-tomer service.

Financing market entry and development fromSwitzerland is also rated as difficult, since loandepartments are not particularly well informedabout the markets in question, and recourse to thesecurities abroad may not always be guaranteed –or can be difficult to enforce. Generally speaking,Swiss bank loans are only used when they can bebacked by collateral in Switzerland. However, truegrowth funding is difficult to implement in thisway. For their part, companies tend to give prefer-ence to local banks in the new markets, particular-ly where the country in question carries large polit-ical risks. From the company point of view, thisreduces the exit costs and improves the negotiatingposition in the event of state intervention.

Cooperative ventures between Swiss exportersand local operators in the target markets are citedas an interesting strategy. Such ventures appear tobe particularly promising when the exporter’s tech-nological expertise is combined with the local part-ner’s accurate knowledge of the market. The opera-tional advantages in terms of market entry andmarket development lie in overcoming the informa-tion deficits mentioned. In addition, this kind ofcooperative venture seems to provide a foundationupon which combined financing arrangements canbe organised. Thanks to the local business partner,the initial investment – usually in infrastructure –can be financed, while the Swiss partner will oftenprovide the operating credit through his commer-cial bank.

The responses on the management of currencyrisks are closely related to the responses on off-shoring, which are presented in the section below.Only 16% of companies surveyed said that theyconduct hedging transactions using modern finan-cial instruments. The vast majority stated that theybear the risk themselves. In the ideal case, thismeans either that the companies budget carefully,or that they absorb and compensate exchange ratelosses and gains over time. Part of the risk isallayed by purchasing more inputs in the currencyarea in which revenues from exports will be earned,or by consciously locating cost blocks there (natu-ral hedging). With respect to individual currencies,it emerges that the euro risk is initially borne bythe companies themselves or reduced by means ofnatural hedging. The US dollar causes the compa-nies more difficulties. Here the risk is considered tobe greater. Nevertheless, hedging is only an optionfor larger companies.


Sources of finance

Company resources; 72% share

Swiss bank loans; 13% share

Foreign bank loans; 14% share

Other: 1% share

Exchange rate risks

Hedging transactions; 16% share

Natural hedging; 42% share

Company bears risk; 42% share

Graph 4Financing and exchange rates

come second. Although most companies attempt toposition themselves in niches where price elasticityis low, the pressure on prices and costs is high inthe global market.

Despite the international treaties, trade barri-ers still exist in places. To some extent they can beavoided by producing locally. Similar problems areevident in the case of subcontractors. For instance,some contractors stated that their customers hadput pressure on them to transfer part of their pro-duction to low-wage countries so that they couldreduce costs and increase the local content of thefinal product.

Increase in imports, but not a ’bazaareconomy’Half of the companies surveyed stated that

the importance of imports was increasing for theirbusinesses. The majority of imports were commodi-ties and semi-manufactures; only 23% were fin-ished products. More than 40% of imports wereused as inputs for companies’ own products, 34%went into final consumption and 25% were re-exported – either directly or after finishing.

Finally, companies were asked whether therehad been any changes in the share of imports. 27respondents said that the share of imports wasincreasing. The reasons given were the morefavourable import prices as compared to local pro-duction (58%) and the better quality of importedgoods (9%). 33% of respondents said that theproducts were not (or no longer) available in


2.3 Offshoring and imports – offsetting the positive export effects?

40 of the 55 companies surveyed stated thatthey had transferred corporate functions abroad, inparticular, production units and distribution. Otherunits mentioned were processes that followed thecustomer or the market (such as maintenance andservice, repair units, packaging and manufacture)or production-related processes (such as sourcingor pre-production processes). Typically, these werelabour-intensive, value-added processes in which itwas clear that the Swiss business location did nothave a comparative advantage. The value-creationcomponent was relatively unchanged despite thetransfer of these processes abroad. In our sample,it stood at about 60–70%, considerably above theaverage for the economy overall, which – accordingto SECO – is below 40% for manufacturing as awhole.5

Closeness to the market was the dominantmotive in the decision to transfer individual stagesin the value-creation chain. This motive is becom-ing increasingly important, as can be seen from anumber of results obtained in the survey. As devel-opment of the export market proceeds, the questionof where to locate the different processes becomesever more pressing for companies. The principle ofcloseness to the customer still appears to be themost important argument. Cost considerations

Graph 5

Closeness to marketCost considerations

Transfer pricing and taxesAvoiding trade barriers

Others

0

10

20

30

40

50

Motives for offshoring

Shares, in percent


5 SECO, 'Outsourcing, Produktionsstruktur und Wertschöpfungsquote,'in ‘Die Konjunkturtendenzen Sommer 2007’, p. 41 et seq.



6 H.-W. Sinn, Die Basar-Ökonomie – Deutschland: Exportweltmeisteroder Schlusslicht?, Econ Business, 2005

Type of imports and their use

Input; share 41%

Re-export; share 25%

Consumption; 34%

Origin of imports

Surrounding area; 31% share

Rest of old EU; 20% share

New EU countries; 12% share

US; 8% share

Switzerland. A number of responses also revealedthat companies now order their commodities directfrom their own sourcing companies or via groupcompanies abroad, and no longer source themthrough regional or national wholesalers. While noin-depth exploration of the discussion on the’bazaar economy’6 that is being conducted in Ger-many will be offered here, the survey results cer-tainly provide no indications that Switzerland canbe said to be a ”trans-shipment conveyer beltwhere goods are merely given a polish and shine”.Imports are used as inputs or for consumption, orexported following a finishing process.

Looking at the procurement markets, the mul-tiple mentions show that, on average, the compa-nies surveyed source their imports from two coun-tries or economic regions. In other words,purchasing is somewhat less diversified than sales.Measured in terms of the volume sourced from theindividual regions, the economies borderingSwitzerland and the other ’old’ EU countries pre-dominate. Here, too, we note a very strong tenden-cy to transfer imports to the ’new’ EU countries andAsia.

3 Conclusion

This survey of experts from the executive man-agement of 55 Swiss export companies has revealedthat integration in the global economy is welladvanced and is moving forward at a rapid pace.The integration encompasses the development ofboth sales and procurement markets, and alsoinvolves the fragmentation of the value-creationchain and the decentralised location of individualparts of processes.

Companies are exposed to competition andfocus on niche markets and activities with a highlevel of value creation. Their growth in export mar-kets is faster than that in the domestic market, andthey source lower-cost primary products abroad.

Switzerland benefits as a business locationfrom the fact that high value-creation activities (asopposed to labour-intensive activities) are carriedout here, that investments are made in infrastruc-ture at the home location as a complementaryactivity to investments made abroad, and that sub-contractors also become highly specialised compa-nies.

As a result of all these factors, the exportcompanies demonstrate that, overall, they haveincreased value-creation, staff numbers and labourproductivity in Switzerland – despite their foreigninvestment. They thereby confirm investigationsshowing that companies which are successfulabroad create an above-average number of jobs inthe domestic market. Extensive integration in theglobal economy strengthens the competitivenessand growth potential of the Swiss economy.

Graph 6Imports, by type, use and origin

SNB Working Papers: Summaries



Globalisation, markups and the natural rate of interest

Jean-Marc Natal and Nicolas StoffelsWorking Paper 2007-14In the last four years, real interest rates have

been unusually low despite historically rapid ratesof growth in the world economy. Most standardexplanations for this ‘conundrum’ have reliedextensively on imperfections in capital markets. Inparticular, a popular hypothesis suggests theappearance of a ‘glut’ of global savings chasing lim-ited investment opportunities. Another line ofargument ascribes the low level of real bond yieldsto a decline in risk premiums.

In this paper, the authors propose a com-plementary perspective, which relies solely ongoods markets developments to explain the lowlevel of real interest rates. They argue that global-isation – modeled as increased integration of tradein goods (and services) thanks to the decline intrade costs – has led to a worldwide erosion infirms’ markups, which in turn has depressed a cru-cial, although non-observable, variable for the con-duct of monetary policy: the real natural interestrate, i.e. the interest rate necessary to bring aggre-gate demand in line with supply, while avoiding achange in inflation.

The ‘conundrum’ of the low level of realbond rates may thus be interpreted as reflecting apersistent drop in the natural real rate of interest,i.e. a decline in expected future short-term realrates.

Outlining a two-country dynamic generalequilibrium model with variable elasticity of substi-tution between goods, the authors suggest twomain – mostly theoretical – proposition:

1. Globalisation – via its impact on firms’ markups –has a potentially significant effect on the naturalrate of interest.

2. Simple, plausible globalisation and markupdynamics may have helped to explain the recent‘conundrum’ of low world interest rates: The mostrecent surge in global competition has depressed(unit) markups and raised output. The unexpect-ed gain in income has encouraged savings, push-ing the real interest down.


Information sharing and credit:Firm-level evidence from transitioncountries

Martin Brown, Tullio Jappelli and Marco PaganoWorking Paper 2007-15When banks evaluate a request for credit, they

can either collect information on the applicantfirst-hand or source this information from otherlenders who have already dealt with the applicant.The exchange of information between banks typic-ally takes place through ‘public credit registries’ or‘private credit bureaus’. Information sharing shouldbe particularly relevant for credit market perform-ance in countries with weak company law and cred-itor rights. Lack of transparency in corporatereporting due to weak company law increases infor-mation asymmetries in the borrower-lender rela-tionship, reducing banks’ incentives to lend. More-over, weak creditor rights make banks morereluctant to lend to risky firms, as contract enforce-ment is costly or impossible.

This paper sheds light on the role of informa-tion sharing between banks in countries with weakcompany law and creditor rights. It analyses theimpact of private credit bureaus and public creditregistries on the availability and cost of credit tofirms in 24 transition countries of eastern Europeand the former Soviet Union. Firm-level data oncredit access and cost of credit, drawn from theEBRD/World Bank ’Business Environment and Enter-prise Performance Survey’ (BEEPS), a representativeand large sample of firms, is used. This firm-levelcredit data is related to country-level indicators ofinformation sharing, compiled from the ‘DoingBusiness’ database of the World Bank/IFC.

The results suggest that, on average, informa-tion sharing is associated with more abundant andcheaper credit. Moreover, the correlation betweencredit availability and information sharing isstronger for opaque firms than transparent ones,where transparency is defined as the reliance onexternal auditors and the adoption of internationalaccounting standards. This result is consistent withthe view that information sharing is particularlyvaluable in helping banks to evaluate credit appli-cants who would otherwise be too costly to screen.The results further reveal that the relationshipbetween information sharing and credit access(cost) is stronger in countries with weaker legalenvironments. This finding confirms the conjecturethat information sharing is particularly valuable tobanks in countries where weak company and bank-ruptcy laws increase the cost of client screeningand contract enforcement.


Who prices locally?

Andreas M. Fischer, Matthias Lutz and Manuel WältiWorking Paper 2007-16Do firm-specific factors explain why some

exporters pursue pricing-to-market (PTM) strate-gies and others do not? Previous research has pri-marily emphasised country and sector-specific fac-tors to explain international price discrimination.This paper, in contrast, reports on the importanceof firm-specific characteristics. It is, for instance,conceivable that large exporters are more likely toprice to the local market than small exporters.There are a number of reasons for this. First, anobvious reason is that large exporters are simplymore likely to supply multiple markets than smallexporters who may concentrate on one market orone buyer, especially if they are supplying interme-diate goods. Second, the higher the share of totalrevenues that derives from exports, the strongerthe incentive to balance the tradeoff betweenexchange rate exposure and the gains from pricinga product to the preferences of the local market.Third, there are likely to be costs linked to interna-tional price discrimination.

To test the hypothesis that firm-specific fac-tors, in particular firm size, are important deter-minants of the decision to engage in PTM, cross-sectional information from the 2006 KOF-ETHsurvey on Swiss exporters was used. The KOF-ETHsurvey asks exporters whether they set differentprices across their export markets and, if so,whether price segmentation occurs because of thepricing conditions in the local market or because ofother factors. This working paper is one of only ahandful of studies to use qualitative informationfrom industrial surveys on price segmentation. Theeconometric analysis presented here uses a probitmodel to regress a binary-choice variable of pricesegmentation on firm-specific information, whilecontrolling for transport costs and the degree ofcompetition in the local market.

The evidence for Swiss exporters finds thatfirm size is coincident with export pricing. Largefirms are more likely to price to the local marketthan small firms. This means that larger firms aremore exposed to exchange rate risk, but simultan-eously benefit from being better positioned in thelocal market.


Safe Haven Currencies

Angelo Ranaldo and Paul SöderlindWorking Paper 2007-17Although the media and financial market liter-

ature frequently refer to safe haven assets, the sci-entific literature has mostly remained silent on thetopic. This study attempts to fill this gap. By focus-ing on foreign exchange markets, it highlights thesafe haven characteristics of some currencies. Morespecifically, the paper addresses two main ques-tions: First, which currencies can actually be con-sidered safe haven assets? Second, how do safetyeffects materialise? To answer the first question,the authors have conducted an empirical analysisthat relates the risk-return profiles of currencies toequity and bond markets. The empirical specifica-tion is lean but still captures two important safehaven drivers. The first of these relates to depreci-ations in safe haven currencies due to a gradualreduction of risk aversion which is typical when theequity market turns upwards. The second relates torisk episodes of a more extreme nature - when riskperception suddenly rises.

To shed light on how safety effects materi-alise, the paper looks into the characteristics andtiming of the safe haven mechanism. It shows sys-tematic relationships between risk increases, stockmarket downturns and appreciations in safe-havencurrencies. Moreover, this risk-return transmissionmechanism is operational from an intraday basis upto several days.

Two main results emerge from this work. First,it demonstrates that the US dollar depreciates asappetite for risk in financial markets decreases. TheSwiss franc and – to a lesser extent – the Japaneseyen and the euro, have significant safe haven char-acteristics and move inversely with internationalequity markets and risk perception. Second, safehaven effects are evident in hourly as well as week-ly data, but seem to be strongest at frequencies ofone to two days. Finally, the paper contributes tothe understanding of some issues that are stronglydebated and relevant nowadays, such as carrytrade, flight-to-quality and contagion phenomena.

Chronicle of monetary events


Target range for the three-monthLibor left unchanged

At its quarterly assessment of 13 March 2008,the Swiss National Bank decided to leave the targetrange for the three-month Libor unchanged at2.25–3.25%. It intends to hold the three-monthLibor in the middle of the target range for the timebeing.


Published bySwiss National BankEconomic AffairsBoersenstrasse 15P.O. Box8022 Zurich, Switzerland

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CopyrightSwiss National Bank, 2008Reproduction permitted with reference to sourceSpecimen copies requested

Language versionsThe Quarterly Bulletin is available in printed form in German (ISSN 1423–3789) and in French (ISSN 1423–3797).

The Quarterly Bulletin can be downloaded in the following languageversions, from the URLs given below:English: www.snb.ch, Publications, Quarterly Bulletin (ISSN 1662–257X)German:www.snb.ch, Publikationen, Quartalsheft (ISSN 1662-2588)French:www.snb.ch, Publications, Bulletin trimestriel (ISSN 1662–2596)

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Complete Quarterly Bulletin...SNB 5 Quarterly Bulletin 1/2008 Sectional breakdown of bulletin Q1/2008 Monetary policy report (p. 6) With persistent turmoil disrupting the interna-tional