Vaccination program key to year of recovery

The launch of the national Covid 19 vaccination program provides confidence. (Image: Aleksey)

According to the UBS Outlook 2021, the Swiss economy is likely to emerge from the Corona crisis and return to robust growth of 3.6 percent. How strong the recovery will be depends on how quickly the general population participates in the vaccination program. Further, UBS forecasts that the SNB will continue its expansionary monetary policy, which will keep Swiss interest rates at record low levels even in a recovery.

The Swiss economy is between trepidation and hope: On the one hand, the coronavirus has the country in its grip, on the other hand, the launch of the national vaccination program gives confidence. However, until the majority of the population participates, the authorities will maintain their restrictive measures and the economy will remain under pressure.

If vaccination program gains breadth, UBS economists expect economy to accelerate significantly – Switzerland-wide and globally. In this second phase, starting in the spring, measures should be gradually scaled back, giving momentum to the economy. Daniel Kalt, chief economist at UBS: "At the moment, a vaccination is the only viable path to a sustainable recovery of the Swiss economy. We are confident that this will indeed happen in the coming quarters." UBS expects gross domestic product (GDP) to grow 3.6% in 2021 and 3.0% in 2022, following a 3.2% decline in GDP in 2020.

In addition to the cautiously optimistic economic forecasts, risks also shape the 2021 economic picture, such as the speed, effectiveness and acceptance of the vaccination campaign, according to the UBS Outlook Switzerland. You decide how quickly and how much the economy can recover.

Quieter year for the national bank

"The recovery is also likely to be reflected in robust growth across most sectors, although there is unlikely to be talk of a return to the pre-Corona trend everywhere. The local growth engines, such as the pharmaceutical industry, suffered little during the crisis and should quickly realize their potential again, but structurally weak, hard-hit industries lack the substance and demand for a return to previous production levels. The losers of the crisis are unlikely to catch up so quickly, which will further drive structural change", according to UBS economists.

The expected economic recovery in Europe should lead to a slight appreciation of the euro against the Swiss franc. That should allow the Swiss National Bank (SNB) to hold off on intervening in the currency market and leave its key interest rates unchanged. Monetary policy and interest rate developments are subject to relatively few uncertainties in 2021. "SNB should have a quieter year despite currency manipulation allegations from Washington", says UBS economist Alessandro Bee.

Friendly basic tenor for residential real estate

Owner-occupied homes and multi-family dwellings became more expensive in 2020 by 3 resp. 5% compared to the previous year. The intact purchasing power of broad sections of the population and the expectation of stable investment returns kept demand high. Both segments are expected to continue to rise in price in 2021, according to UBS economists. However, the price increase is likely to slow down significantly compared with the previous year. For multi-family properties, the potential for further increases at current interest rates and rents is virtually exhausted in prime locations. Residential rents are likely to fall by around 1%.

The office space market is expected to be little changed overall in 2021. New leasing of space will slowly pick up again. However, uncertainty about the long-term development of demand is weighing on office properties. Retail spaces suffered from significant sales declines in brick-and-mortar non-food retail and continue to struggle with rent shortfalls in the coming months. But they are likely to fare better than commonly expected in the long term as the price advantages of online trading erode.

Before Corona is not after Corona

For the time being, the expected recovery on the real estate market will soon bring about a return to apparent normality. But the number of people working in regular home offices is expected to double in the next five years from pre-Corona levels. Claudio Saputelli, Head of Global Real Estate in the UBS Chief Investment Office (CIO), predicts: "If only a small proportion of demanders reconsider their residential or business location, this will have a significant impact on real estate prices in the medium term in the region."

Residential real estate in regions just outside the classic commuting distances and easily accessible tourist destinations will be in greater demand. The main beneficiaries are likely to be the Lower Valais, the Chur Rhine Valley and the Lake Constance region. On the other hand, classic commuter communities in the closer agglomerations are likely to become less attractive. The catchment area of potential workers and consumers is likely to become even more important to UBS economists when choosing the location of commercial premises.

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