Global crises cloud economic crystal ball

Shockwaves from the Japanese disaster are not fully known AFP

The Swiss economy is expected to grow faster than previously thought despite destruction and nuclear fears in Japan, conflict in Libya and Portuguese debt problems.

While admitting that a series of global crises may dent positive forecasts, several economists have upwardly revised figures in the last month. The rosy predictions put further pressure on the central bank to raise interest rates.

A burst of economic activity in the second half of 2010 has quashed fears that the strong franc would force a significant restriction of exports.

The KOF Swiss Economic Institute was the latest group to upgrade its 2011 gross domestic product (GDP) forecast from 1.8 per cent in December to a new prediction of 2.8 per cent on Friday.

The Swiss National Bank (SNB), the State Secretariat for Economic Affairs (Seco) and BAK Basel Economics have all raised their own forecasts in the past few weeks.

The general air of optimism in the midst of so much global turbulence once again reinforces the view that the Swiss economy is to some extent insulated from problems seen elsewhere around the world.

Meltdown threat

The devastation caused by the tsunami in Japan is predicted to have little direct effect on Switzerland as only 3.3 per cent of total Swiss exports go there. However, Seco warned last week that  a nuclear disaster could have serious consequences for the global economy.

“In such a scenario, the standstill of production lines would be prolonged and the dimension of the crisis would be further aggravated,” Seco said. “The financial markets would face a new period of deep incertitude.”

Jan-Egbert Sturm, head of KOF, predicted on Friday a swift recovery for the world’s third largest economy.

“What we often observe in such situations is a short term negative impact followed by recovery,” he told swissinfo.ch. “The investment needed to rebuild infrastructure could actually stimulate medium term growth rates.”

BAK Basel has warned that a spread of the violent troubles in Libya to the Middle East, affecting oil supplies, could also reduce its 2011 GDP forecast from 2.4 per cent to 1.4 per cent.

European debt

The latest news from Portugal has heightened fears about the European debt crisis, that has already done so much to deflate the value of the euro against the franc.

The resignation of the Portuguese Prime Minister this week, after parliament rejected his austerity budget, has raised concerns that the country will follow Greece and Ireland as a recipient of emergency European Union bail-out funds.

But Sturm does not believe Portugal’s capitulation would cause as many problems as did Greece or Ireland’s.

“The discussion about Portugal having to accept emergency funding has been ongoing since the end of last year,” he told swissinfo.ch. “This would not be a big surprise so we would not expect financial markets to react to the same extent as last year.”

But he admitted that KOF’s latest forecasts are still surrounded by “huge uncertainty” considering the scale and number of  events occurring around the world.

One thing economists agree on is that the SNB will come under greater pressure to raise interest rates from the middle of this year.

Interest rate dilemma

Last week, the SNB maintained its target range for the three-month Libor rate (London Interbank Offered Rate) at 0.0 per cent to 0.75 per cent, with a target rate of 0.25 per cent.

The Swiss Financial Markets Supervisory Authority (Finma) entered the debate on Tuesday, warning that too great a delay in raising rates could force a sudden and rapid rise that would be detrimental to the Swiss economy.

The SNB recently raised its 2011 inflation forecast from 0.4 per cent to 0.8 per cent as oil and other commodity prices continue their rise. BAK Basel has a far more severe prognosis, predicting inflation of two per cent this year, fuelled by rapid economic growth and low interest rates.

KOF disagrees, forecasting inflation of just 0.7 per cent in 2011. But that did not stop Sturm from adding his voice to a call for an interest rate rise from June.

“The SNB is in a very difficult situation,” he told swissinfo.ch. “There is a feeling that the currency will continue to appreciate, but on the other hand we are witnessing very robust domestic economic growth that would benefit from higher interest rates.”

“We cannot wait forever to see interest rates normalised again and I think it is about time the SNB started doing so.”

Economic forecasts

The Swiss economy grew by 2.7% last year despite pressure on exporters caused by the strengthening franc.

At the end of 2010, most economists had predicted a significant drop-off in GDP growth this year, mirroring a global trend as government spending tailed off.

But the continued expansion of the Swiss economy has forced economists to revise their predictions.

In December, KOF predicted Swiss GDP to grow by 1.8% in 2011, but revised this significantly upwards to 2.8% on Friday.

Seco also raised its forecast to 2.1% this month from 1.5% expressed in December.

The SNB believes the Swiss economy will expand by 2% this year, revising its 1.5% estimate at the end of 2010.

BAK Basel is also more optimistic than a few months ago, now believing GDP will grow by 2.4% from an earlier forecast of 1.7%.