International and National

We are going through a strange period. In the real economy, it is true that GDP growth is slowing slightly in Europe and Switzerland, but it remains strong in the United States and Japan. Business activity and new orders remain at a healthy level, both nationwide in Switzerland and in the canton of Neuchâtel. Internationally, concerns stem mainly from the financial markets and the monetary environment. After a period of strong growth over the past two years, market indices are on the decline, and this trend is unlikely to improve given monetary policies that are significantly less favorable to financial market participants. A downturn therefore remains possible.
International tensions do not appear to be significantly affecting the Swiss economy due to its limited exposure to trade with Russia and Ukraine. More structurally, it is Switzerland’s position as a hub for international trade that is at stake, particularly in commodities trading and as a destination for high-net-worth individuals.
For now, there are no signs of a recession in Europe, but the big question mark, of course, is the rise in inflation in the EU and the United States. Concerns date back to the middle of last year. At that time, the issue was isolated supply-side shortages, which were expected to resolve themselves as demand rebounded following the end of the health crisis. As for oil, Russia continues to supply it steadily. While households and financial institutions certainly have an abundance of liquidity, this excess liquidity has not led to rising prices in the goods and services markets for many years. So how can we make sense of this 7.5% inflation rate in the EU—and even higher rates in the United States? Let’s venture an explanation: inflation driven by the expectations of economic actors. An increasing number of people are anticipating high inflation, and this is causing it to materialize. Market participants see others raising their prices, and everyone wants to join the party for fear of missing out. The fire has been set in the pine forest, and the fuel is likely households’ cash savings—already substantial before 2020 and further increased during the COVID-19 pandemic. For Switzerland, however, inflation remains under control—2.5% in April —especially since the value of the franc is likely to rise rapidly.
The problem today is that it’s unclear what forces might counteract rising prices. Indeed, it’s hard to see how monetary tightening could influence these expectations. It would simply risk slowing down the real estate sector and causing stock prices to plummet.
In such a situation, we must reorient the system and restore its meaning for market participants. Why not take advantage of this period of prosperity and structural uncertainty to accelerate the energy, ecological, and climate transition? The unfolding political-energy crisis is opening a path that we would be very ill-advised not to follow. The issue is no longer about doing without Russian gas or oil, but rather about doing without fossil fuels altogether. Circumstances are leading us in that direction in a providential way. Restoring credible, forward-looking expectations for the wise use of savings is likely to ease short-term concerns and disorganization.

Canton of Neuchâtel

An apparent indifference to international uncertainties

In the canton of Neuchâtel, exports continue to drive employment, and the number of job openings posted by the ORPs is at a particularly high level. It should be noted that, although Russia is an attractive market, according to 2021 customs statistics, it accounted for only 1.25% of watch exports. New orders remain at a high level. Product inventories are low, and production capacity is being heavily utilized. There are even signs of an improvement in the industry’s outlook within the canton.
On the other hand, the Neuchâtel economy’s exposure to exchange rate fluctuations remains significant, and the situation could become a cause for concern. The anticipated scenario is a sharp decline in the value of the euro, though less so for the dollar. Over the past few decades, the canton has specialized in goods where price competitiveness is not a decisive factor, such as watchmaking, or in sectors where demand is inelastic, such as specialized machinery and pharmaceuticals. The subcontracting sector, on the other hand, risks seeing its margins shrink.
Imported inflation, particularly in energy and energy-intensive products and services, is reducing household purchasing power, which could slow down the local residential market and, ultimately, construction. It does not appear we have reached that point yet, especially since unemployment continues to decline and job openings remain plentiful.
In the tourism sector, while the return of foreign visitors has begun, everything will depend on whether German-speaking Swiss continue to choose to vacation in Switzerland rather than abroad.

Olivier Crevoisier – Professor of Regional Economics – University of Neuchâtel

To view interactive economic data: ne.ch