Swiss economy expected to keep up recovery

Switzerland's export industry has suffered because of the global recession Keystone

Switzerland’s economic rebound from the global recession is expected to continue throughout this year and 2011, according to economists.

The KOF Swiss Economic Institute has predicted sustained gross domestic product (GDP) growth, falling unemployment and a pick-up in exports as a result of a weakening of the franc. However, there are still potential hurdles to a recovery.

Switzerland held out relatively well against the global recession, but still suffered a 2.5 per cent GDP decline last year and saw unemployment rates pass the four per cent mark.

But a general easing of conditions in recent months has left KOF predicting GDP growth rates of 1.7 per cent this year and 2.2 per cent in 2011. This compares to an estimated average global growth in economic output of 1.9 per cent and 2.1 per cent over the next two years.

“We are not very optimistic, because the growth rates that we are predicting are still below potential, but we are becoming optimistic,” KOF head Jan Egbert Sturm told swissinfo.ch.

“We see that the worst is over and signals that investment activities of firms are increasing again, which is normally a very good indicator.”

But Sturm added that a recent peak in economic performance would be short-lived as it was driven by cyclical factors. And larger potential effects are still lurking in the background.

Franc woes

One of the factors currently weighing on the Swiss economy is the strength of the franc, particularly in relation to the currency of its main trading partner, the euro.

The problem has been compounded by the massive debt of European Union member Greece, which have driven down the value of the euro. The euro was trading at an historic low of SFr1.4274 on Thursday, prompting Swiss Economics Minister Doris Leuthard to express her concern.

However, with other EU members putting together a €22 billion (SFr31.5 billion) safety net package to help Greece climb out of its current woes, the euro gained strength on Friday.

The Swiss National bank had reportedly been intervening to stabilise the franc, but KOF predicts the pressure will start easing next year. Until then, the franc’s reputation as a safe currency to invest in during turbulent times will continue to keep it artificially high, according to Sturm.

Mountainous debts

“The strong value of the Swiss franc is largely driven by safe haven effects,” he told swissinfo.ch. “Once these safe haven arguments have been reduced we would expect a normalisation of exchange rates.”

“The problems of Greece will probably stay in place for some time,. But the dramatic situation that we now have, and the way the financial markets have reacted, will not last forever. A political solution will release tension on the markets.”

Greece is not the only country that has racked up mountainous debts. The United States, Italy, Spain and Britain are among a host of nations facing a huge bill to service.

Switzerland ended 2009 with a surplus, but if another country threatens to default on debts the consequences would ripple around the world. How nations handle this debt will determine the sustainability or otherwise of the global economic rebound, said Sturm.

“In the medium to long term the major cause for concern is the way fiscal policies will deal with substantially increased debts and deficits around the world. National debts have increased to a degree we have never before seen in peace time,” he warned.

Matthew Allen, swissinfo.ch

KOF economic prognosis

The KOF Swiss Economic Institute’s latest economic forecast predicts GDP growth of 1.7% this year and 2.2% in 2011.

Unemployment rates, currently hovering around the 4.5% mark, should drop to 3.7% in 2011.

Companies are expected to increase investment in machinery and equipment to the tune of 2.4% this year and 10.5% in 2011.

Swiss exports are expected to pick up by around 3% this year and a further 4.2% in 2011.

Private household consumption is tipped to continue rising despite static pay developments and high unemployment – by 2.1% in 2010 and 2% next year.

KOF does not expect the economic recovery to send price rocketing through the roof. It forecasts inflation of 0.9% in 2010 and 1% in 2011 despite a temporary 0.4% hike in VAT starting from next year.