Economists tell government to reform now

The economy is doing well but experts still want reforms Keystone Archive

One of Switzerland's leading economic forecasters says now is a good time for the government to carry out much called-for reforms.

The Swiss Institute for Business Cycle Research (KOF) on Thursday revised its 2006 growth forecast from 1.5 per cent last October to 2.1 per cent and predicted GDP growth of 1.9 per cent in 2007.

“If the economy is doing well, it’s always easier to implement new ideas and to have some restructuring going on than in a period in which the economy is not doing well,” Jan-Egbert Sturm, the institute’s new head, told swissinfo.

“I think the government should actually use this period to conduct some progress on many fronts, for instance in the area of health care, in the area of simplifying the tax system and the agricultural sector.”

International organisations including the Organisation for Economic Cooperation and Development and the International Monetary Fund have long called on Switzerland to make reforms to improve the country’s competitiveness.

Strength

While the debate on reforms goes on, all the country’s leading economic indications are pointing to stronger growth in the months ahead.

Also on Thursday, BAK Basel Economics and the University of Lausanne’s Créa Institute of Applied Economics forecast that GDP would rise by two per cent this year.

Sturm explained why KOF – part of the Federal Institute of Technology in Zurich – has upgraded its predictions.

“What we’ve seen since October last year is that the world economy has developed better than we had expected and especially Europe is doing better.

“The other aspect is that internally the Swiss market is doing much better than we expected, in particular consumption is growing stronger than we thought, so that’s very positive,” he said.

While private consumption is set to continue at a high level, investments – especially in equipment – are increasingly strong and are set to be the locomotive of this and next year.

KOF feels that the domestically driven recovery that started in 2005 will continue but with a shift from the construction industry to investment in machinery and equipment.

Oil concerns

There have been fears that the price of oil will undermine Switzerland’s economic recovery, in particular as regards the inflation rate.

But KOF says volatile oil prices in its forecast period for 2006 and 2007 should not be cause for too much concern.

“What we’ve done in this forecast is basically assume that the oil price will stick at its present level of $60 (SFr77.4) a barrel. Given that that is the case, we don’t think there are real inflation pressures here,” Sturm said.

KOF reckons that average annual inflation should fall back to 0.9 per cent this year and to 0.6 per cent in 2007.

It also believes that the Swiss National Bank should stick this year to its current pace of raising key interest rates at 25 base points per quarter. For the end of 2006, KOF expects a target rate of two per cent.

“From a European perspective we’re doing very well. From a world perspective of course there are regions that outperform us as well,” Sturm said.

swissinfo, Robert Brookes in Zurich

Key facts

KOF forecasts for 2006/2007

GDP: 2.1%/1.9%
Private Consumption: Expected to reach 2% at its peak
Inflation: 0.9%/0.6%
Unemployment: 3.4%/2.9%
Exchange rate: By the end of 2007 – about SFr1.53 to the euro

In brief

KOF feels that the United States economy is losing momentum, not least due to a deceleration in the real estate market.

Foreign trade, it says, is weakening in the European Union.

Asian economies should grow somewhat slower than last year. In China, private consumer demand and import demand is expected to strengthen.

In other parts of the world, including Latin America and Russia, domestic demand is growing too, it says.