Swiss economy hears mixed messages

Consumers continue to drive the Swiss economy Keystone

The Swiss economy is set to grow significantly more than previously thought, new figures from the Organisation for Economic Cooperation and Development indicate.

But Zurich’s Institute for Business Cycle Research (KOF) reported on Wednesday that business expectations are steadily falling. The Swiss National Bank said it would continue to raise interest rates.

The OECD raised Switzerland’s 2006 gross domestic product (GDP) growth prediction to three per cent from the 2.4 per cent forecast in May. The rate of growth will slow to 2.2 per cent next year and two per cent in 2008, according to the latest verdict.

Industry order books were full, the tourist season was successful and exports rebounded in the third quarter, the OECD report commented on the increased optimism.

The OECD put the expected slowdown in the next two years down to the likelihood of further interest rate hikes and slower exports. But strong domestic demand should dampen any negative impetus.

However, growth will remain relatively vigorous, sustained by business investment and private consumption, which is likely to be boosted by dynamic job creation, while the economy’s competitiveness will also stimulate exports, the report said.

Low inflationary pressure coupled with falling unemployment should also bolster the economy.

More reforms needed

The Paris-based group warned again that Switzerland must push ahead faster with reforms to avoid losing momentum. In particular, changes should be made to the welfare system and to stimulate greater competition.

Recent economic results, though encouraging, must not lead to complacency: potential growth needs to be strengthened, which requires the pursuit of reforms to stimulate competition and boost productivity, the OECD said.

The Swiss National Bank hinted strongly that it would continue raising interest rates to prevent the economy from overheating. A declaration on Tuesday by its president, Jean-Pierre Roth, signals a possible increase in December, taking the benchmark rate to two per cent.

“The Swiss economy is working in a situation of full employment. It is therefore necessary to continue the correction of interest rates,” Roth said.

The central bank expects growth to peak at just under three per cent this year and slow to two per cent in 2007, the strongest performance in six years.

However, the latest KOF indicator fell for the fourth month running, falling lower than expected to 1.73 in November from a downwardly revised 1.95 the previous month.

The indicator measures business expectations for the likely performance of the Swiss economy in the next six months.

Switzerland’s industrial and construction sectors are the most pessimistic, while the banking, European Union export and Swiss consumption indicators show only a slight dip in confidence, according to KOF.

swissinfo with agencies

Key facts

OECD forecasts for other GDP growth rates:
Eurozone: 2.6% (2006), 2.2% (2007), 2.3% (2008)
United States: 3.3% (2006), 2.4% (2007), 2.7% (2008)
Japan: 2.8% (2006), 2.0% (2007), 2.0% (2008)

In brief

In May, the OECD predicted a GDP growth of 2.4% (now 3%) for 2006 and 1.8% in 2007 (now 2.2%).

The latest OECD report expects the percentage of people out of work in Switzerland to fall from 3.9 per cent this year to 3.6 per cent in 2007 and 3.3 per cent in 2008.

The Swiss National Bank (SNB) predicts that the unemployment rate will drop below 3% next year.

The bank forecasts inflation rates will average 1.3% in 2006 and 1.1% in 2007.

Observers expect the Bank to raise interest rates for a fifth consecutive time at its quarterly meeting in December with the possibility of another increase in March. The benchmark rate was raised to 1.75% in September.