Swiss Economy Hit By Eurozone Crisis

by Ulrika Lomas, Tax-News.com, Brussels

20 December 2011

The federal government’s expert group on economic forecasts has recently announced sluggish growth prospects for the Swiss economy, in view of an increasingly bleak economic outlook in the European Union (EU) and given the strong Swiss franc.

Although the group acknowledged that the Swiss economy has quickly lost momentum over the last months, it points out that an economic crisis similar to the one experienced in 2008 and 2009 seems unlikely however.

Under the assumption that the euro debt crisis does not further escalate, the group predicted that the economic slowdown in Switzerland should be limited in depth and time, forecasting weak GDP growth for 2012 (+0.5%), followed by a recovery in 2013 (+1.9%). Unemployment will noticeably rise in 2012 as a consequence of the faltering economy, it warned.

According to the Swiss federal administration, economic growth in Switzerland has been robust throughout the first half of 2011, although it slowed markedly in the second half of the year, in particular during the third quarter. The administration notes that the modest growth in the third quarter (+0.2% over the previous quarter) came mainly from the domestic sector, in particular construction.

The administration adds that on the other hand, the unfortunate combination of a weaker global economy and a still strong Swiss franc began to exert a drag on Swiss exports during the third quarter, noting that capital expenditures also declined during the third quarter.

Noting the Swiss National Bank’s (SNB) exchange rate intervention, in which a lower limit on the CHF/euro exchange rate was introduced, the administration underscored that this served to stabilize the currency situation for many companies, while acknowledging that even at its present exchange rate (approximately CHF1.23/EUR) the franc remains highly valued, and that the corresponding high unit labour costs continue to harm the international competitiveness of companies in Switzerland.

Both exports and solid domestic demand are expected to help the economy return to growth in 2012 and 2013.

Concluding its statement on the Swiss economy, the administration states that: “Uncertainties associated with the European debt crisis emerge clearly as the greatest economic risk. A central requirement for a mild economic downturn (internationally and in Switzerland) is the absence of a broad-based banking crisis. Such a crisis could potentially have severe consequences on the real economy (for example in the form of a serious credit crunch for companies). As the financial markets remain nervous, it is still not possible to say that the worst is over.”

“On the other hand if trust could return to financial markets in a sustainable way, a very positive impact on economic prospects could be expected. On the one hand, the Swiss economy would profit from the associated improvement in the eurozone's prospects. On the other hand, it may lead to a lower value of the franc (weakening safe-haven effect), which would in turn support exports,” the administration concludes.

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