Cooling Global Economy Hits Swiss Growth
Wednesday, September 21, 2011

According to the Swiss federal government, the economic outlook for Switzerland has deteriorated over the past few months due to unfavourable foreign trade conditions, notably the significant slowing of the world economy coupled with the high valuation of the Swiss franc, even after introduction of an exchange-rate floor to the euro.

The government points out in a recent release that the negative impact on exports and on company investments could sharply slow economic growth in Switzerland over the short term. The federal government’s expert group is therefore projecting gross domestic product (GDP) growth of 0.9% in 2012 (after 1.9% for 2011).

As a result of the economic weakness, the government predicts that unemployment in the coming year may rise for the first time since 2009. Another risk for generating a worse economic outlook, with more recessionary tendencies, might be further upheavals on the financial markets resulting from further critical developments in the European debt crisis, the government adds.

Regarding the international economy, the government states that the prospects have dimmed over the past few months, underlining the fact that in July and August there was a general and further loss of confidence on the financial markets. These market upheavals resulted in part from the lack of convincing political solutions, so far, to the European public debt crisis, the government notes.

Alluding to economic uncertainties over the coming quarters in the eurozone, and noting that even developing countries (in particular in Asia but also Latin America and eastern Europe), which grew strongly over the last few years, are affected by the global slowdown, the government explains that in the first half of 2011, Swiss economic growth remained solid despite the first signs of a slowdown. However, the signs of a significant weakening in the second half of the year have increased. The noticeable decline in sentiment indicators over the summer months is a clear warning that economic developments in the third quarter should be much weaker.

It states: “The exporting sectors, including tourism, are facing a particularly difficult economic situation. Over the course of the current year the export of goods still had positive growth but this was primarily the result of price reductions. The unfortunate currency situation has primarily hurt the profit margins at companies, while export levels have remained generally high. A further problem is now the declining growth path in the global economy.”

It adds: “The currency situation has relaxed somewhat thanks to the setting of the exchange rate limit to CHF1.20/EUR as it has stopped the franc from continuing to soar on the currency markets. It may be seen as a positive sentiment signal for companies and have a positive impact on medium term investment planning (location decisions) in Switzerland. However, the franc is still very highly valued when compared to practically all important currencies.”

“The unfavourable constellation of the economic weakness and the strong franc may temporarily cause economic growth in Switzerland to drop.”

Concluding its statement, the government emphasizes that the biggest threats to the global economy and to Switzerland are still the tense situation surrounding the European debt crisis and the associated nervousness on the international financial markets. Sustained financial market turbulence could have an impact on the real economy in the form of a sustained decline in share prices, with negative effects on wealth. Also, restrictive credit conditions could emerge should the banking sector come under more stress, and investment decisions could be postponed due to insecurity.