Teaser Lecture: The Economic Situation & Forecast 2017 by Prof. Dr. Aymo Brunetti
Rochester-Bern’s latest Teaser Lecture was held by economics professor Dr. Aymo Brunetti at the Universität Bern and focused on the extraordinary interest rate situation, the normalization of the monetary policy and a forecast of 2017.
Knowing the recent past and where we are right now is fundamental for any forecast of future economic developments, Prof. Aymo Brunetti stated right at the beginning of his talk. In this context, focusing on the general framework is more important in forecasting than talking about precise numbers, as they are always uncertain, he continued. Any consequences of economic changes, may these be short or especially long term, need to be considered. Thus, developments that might not have a great impact in the next year can greatly change the economy in the next decade.
The Economic Situation
The first part of Prof. Brunetti’s speech focused on the GDP development in Switzerland compared to Germany, as the best-case situation, and the rest of the Eurozone, usually in a worse position. In order to explain the short-term development of GDP three components are most important: consumption, investment and net export. In general, the macroeconomic situation is comparatively strong in Switzerland, due to sound public finances (no structural deficits), a low unemployment and high employment, a respectable growth performance and a resilient export industry (especially in the pharmaceutical industry). However, as Prof. Brunetti pointed out, this island of stability has costs, namely the exchange rate.
The Extraordinary Interest Rate Situation
In the second part, he analyzed possible future developments, especially in view of the extraordinary interest rate situation and the normalization of the monetary policy. The falling nominal interest rates he explained are not due to a fall in inflationary expectations but to a fall in real interest rates. An increase in savings, especially by the now working baby-boom generation that is saving for retirement; a fall in investment, and a fall in economic growth are the main drivers for the secular fall in real interest rates. Since the 1980s the real interest rates were reduced by about 4.5% due to these factors and they are unlikely to increase in the next two to five years. However, in the next decade, they should increase, as the baby-boomers will retire and withdraw their savings.
The Normalization of the Monetary Policy
As a last point, Prof. Brunetti’s explained the importance of a normalization of the monetary policy. There are several risks if the timing is not right: too late and we risk inflation; too early and we risk a recession. In any case, there are major exchange risks. In summary, liquidity needs to be cut back, but the speed of adjustment needs to be right. With a focus on the US, being in a better position than the Eurozone, Prof. Brunetti concluded his speech by pointing out that there are no immediate inflation risks at the moment, but that this is likely to be different in the next three to five years, if no actions are taken.
Prof. Brunetti’s thought-provoking Teaser Lecture, as part of Rochester-Bern’s Information Evening for future and current students, alumni and other interested guests, was rounded off with a successful networking apero with tapas and wine.