Swiss economy tipped to weather strong franc

GDP for 2015 and 2016 is expected to be +0.9% and +1.8% respectively Keystone

Although the appreciation of the Swiss franc will have a detrimental impact on the competitiveness of Swiss companies, brighter economic prospects for Europe and the United States should alleviate these negative effects, a Swiss government expert group has forecast.

The Swiss economy experienced a shock on January 15 when the Swiss National Bank (SNB) announced its decision to abolish the exchange rate floor against the euro. This led to a rapid appreciation of the Swiss franc and a rush of doomsday predictions.

But two months later, things are looking a little more positive. On Thursday the State Secretariat for Economic Affairs (Seco) downgraded its 2015 GDP forecast to 0.9% from the 2.1% predicted in December last year. Its growth forecast for next year has been reduced from 2.4% to 1.8%.

This compares to 2% GDP growth last year in which the economy created 33,000 jobs.

But Seco is nevertheless cautiously optimistic for the future. “Switzerland may experience a temporary economic slowdown. However, in the current environment there are no signs of any sharp downturn – with a marked fall in economic activity and a sharp rise in unemployment,” it said in a statement.

The latest forecast refers to positive news coming from the US, where economic growth clearly accelerated in the second half of 2014 and unemployment is down to 5.5%, its lowest level since the outbreak of the financial crisis.

The economic recovery in the euro zone also gained momentum in the second half of 2014, primarily thanks to the stimulus provided by private consumption, the statement said.

Deflationary trend

Also on Thursday, the SNB decided to stick with its negative interest rate policy to counter deflation. The central bank’s three month Libor target range remains at between -1.25% and -0.25%. It will continue to charge institutional investors 0.75% on deposits held at the SNB.

The central bank has forecast a deflationary trend for the next two years with -1.1% inflation this year followed by -0.5% in 2015. Inflation will not move into positive territory until 2017, the SNB has predicted.

Consumers and mortgage holders will continue to gain from the negative interest rates, but there are fears it could spark further unstable growth in real estate prices and dent pension fund returns.

The SNB also downgraded its GDP growth forecast for 2015 from a previously stated 2% to just under 1%.

On Wednesday, the United States Federal Reserve hinted that it may raise interest rates later this year for the first time in a decade.