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Switzerland — Upswing loses momentum, outlook remains intact

21 September 2010

The latest forecasts published by the Swiss Economic Institute (KOF) reveal that with a GDP growth of 2.7% in 2010, the Swiss economy has performed better than the EU and the US. In 2011, however, economic growth will be somewhat weaker, at 1.8%. The slow-down of the world economy and the strong Swiss franc will put a damper on the upturn. In 2011, private consumption will grow by 1.6%. The unemployment rate will drop to 3.2% in the coming year.

Thanks to the strong recovery in recent months, the Swiss economy was able by and large to counterbalance the slump in GDP during the latest recession. In the meantime, the international economic environment has become more favourable.

The surprisingly good development in Germany during the second quarter of 2010 was in sharp contrast to the negative headlines from other European countries (keyword: public debt). Moreover, the strength and endurance of the upswing in the USA is still being discussed. Mid-2009 fears that the incipient upturn in the world economy could end up as a double dip (W-shaped) recession has not materialised. The reason for this is first and foremost the booming economies in Asia.

Switzerland's economic activity has increased significantly this year. The world economy experienced a rapid recovery in production and trade, due in part to the stimulus packages passed in many countries and the readiness of companies to restock their inventories that had been reduced during the crisis. Manufacturing in Switzerland was ramped up and available production capacities could be better utilised. Unemployment figures have declined steadily since the beginning of the year.

The KOF expects an average unemployment rate of 3.8%. Disposable income climbed more than consumer spending and the population is once again growing. This will help push up consumption to a remarkable growth of 1.9% for the current year. The KOF sentiment indicators also point to a continuation of the upswing until the end of the year. GDP will therefore grow at a gratifying 2.7%.

The Swiss economy is unlikely to be able to maintain its momentum in 2011. At the present time, the world economy is suffering a setback, brought about by austerity packages and the end of a vigorous inventory cycle. In addition, the situation in the coming months will be determined mainly by the development of the Swiss franc. The franc came under strong upward pressure against the Euro. Behind this was a combination of two developments. Firstly, Switzerland proved to be more resilient in the face of the financial and economic crisis than some of the other industrialised nations. Secondly, the Swiss franc was once again perceived a safe haven currency. Ever since June of this year, the Swiss franc has also been strengthening against the US dollar and the British pound.

The high exchange rate for the franc is increasingly putting a strain on export-oriented firms. The impact on the Swiss economy has been limited until now thanks to the simultaneous growth in the economic activity in Switzerland's most important export destinations. The tourism sector, however, is already experiencing a decline in demand by visitors from the Euro area. Should the franc remain strong, it will exacerbate this tendency and affect tourist inflows from other countries as well. This applies equally to the other sectors of the economy which are dependent on exports. After strong growth rates of 9.3% in the current year, overall exports will only go up by 3.3% in 2011. However, 2012 will see an acceleration (6.5%). Imports, on the other hand, will experience relatively strong growth of 6.4% in the coming year owing to the favourable development of the exchange rate and robust domestic demand. They will grow by 6.5% in 2012.

Prices will only rise moderately. Currently, there are no noteworthy risks of inflation or deflation. The KOF assumes that the Swiss National Bank (SNB) will raise interest rates slightly at the beginning of 2011. Intervention by the SNB could come earlier due to the development on the real estate market. House prices have continued climbing and the mortgage loans have also registered high rates of growth. If the increase in real estate prices or in residential building activity continues, these could be dampened by a rise in interest rates.

The recovery of the labour market will continue in the coming year. The KOF is expecting a further reduction in the unemployment figures with a rate of 3.2% for 2011 and 2.8% for 2012. At the same time, salaries in the coming years will not rise steeply, and 2011 might even see a decline in real wages. One of the causes for this is the shrinking profit margins of exporting firms owing to the exchange rate. Private consumers are not expected to be significantly affected by the development of the exchange rate. In fact, they could even benefit from the cheaper currency in neighbouring countries. For private consumption, the KOF is forecasting growth rates of 1.6% and 1.7% for 2011 and 2012 respectively, which corresponds to the average growth rate of the past ten years.

Increasing growth rates are expected for investments in machinery and equipment, which will profit from the 'catch-up effect' following the decline in investments during the recession. Construction investment, which proved to be robust even during the crisis, will continue to be positive, albeit a little weaker and will grow by 1.0% in 2011 and 1.2% in 2012.

The clearest risk for the forecast is the exchange rate. The KOF expects the franc/euro exchange rate to reach a value of 1.40 by the end of the forecast period. Should the exchange rate continue sliding towards 1:1 parity, then the economy would be more severely affected than described above. But there is also an 'upward risk': an exchange rate of 1.50 would give the economic growth forecast here an additional boost.



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