The Swiss Economy Faces Economic Slowdown

Bern, 14.12.2010 - The Expert Group's Assessment of Economic Trends and Forecasts - Economic Forecasts for Switzerland – Winter 2010/2011*. In spite of the to date brisk growth dynamics of the Swiss economy, there are mounting indications that the export development will worsen next year, resulting in an economic slowdown. However, thanks to the relative resilience of the domestic market so far, the expected slowdown should remain limited. The federal government's expert group forecasts a slowdown of GDP growth from 2.7% in 2010 to 1.5% in 2011. Given a gradual improvement of the international trade conditions, the Swiss economy should gain some momentum again in 2012 (+1.9%). The unsure global economic situation, the continued tense situation on the financial markets and the yet unsolved debt problems of many industrialized nations make up considerable risks for the economic situation in 2011 and 2012.

International Economy
The recovery of the world economy following the “great recession” has until now proceeded in a very heterogeneous manner. While it predominantly was a large number of emerging countries that showed high growth dynamics in 2010, the majority of the industrialized nations are now experiencing a deceleration in growth. In the United States, economic growth in 2010 did not - as was feared for a while - come to a complete standstill. The economic recovery, however, is to date too weak to lead to an improvement in the desolate employment market. For the EU, there has overall for 2010 been moderate economic recovery, however with significant divergences between the individual countries. The German economy, in particular, is showing great recovery from the export slump, and has now taken the role as the economic engine in the euro area. In contrast, the economic development in the countries in the periphery of the euro area, which are particularly affected by the national debts crisis (Greece, Ireland, Portugal, and Spain), is severely strained due to the sharp rise in interest rates, and the announced fiscal consolidation measures.

The public debt crisis in the euro area has further escalated during the last weeks. Due to the desolate situation of its banking system and public finance situation, Ireland has been forced to make full use of the EU/IMF rescue package. On the financial markets there was a general increase in mistrust of the peripheral countries and there is no sustainable abatement of the crisis in sight. One serious problem is that most of the affected countries face poor economic prospects for the coming years, which seriously reduces their possibility to overcome their debt problems by own means. It is therefore to be feared that the financial markets' confidence in the public finances of the peripheral euro nations will remain weak and it cannot be ruled out that this might spread to other countries. However, one should assume that European Economic Policy will face any further spread of the crisis with strong counter-measures in order to prevent the incalculable risks involved by a new intensification of the euro zone tensions and a potential revival of the financial crisis. Thus, according to the expert group, a stabilization of the public debt crisis in the Euro area occurring in the coming two years is likely, even if no clear solution has been found and proposed so far to address in the long run the problem of very high public sector indebtedness and the associated vulnerabilities.

For the forecast, the expert group lays out its assumption that the national debts crisis in the euro area, which still remains to be overcome, will continue to strain the European economy, but that it will not bring it to a standstill. The expert group also assesses that the US economy, given the continued poor condition of the real estate market, and weak prospects for consumer spending in the coming year, only will show moderate economic growth. For the USA and the EU, progressive economic momentum and improvements on the employment market can therefore - in a best-case scenario - first be expected in the course of 2012. To the contrary, emerging economies will continue to drive world growth, although the risks of slightly unstable economic growth in these countries have increased recently; many emerging countries have experienced a strong capital inflow, which could result in an excessive currency revaluation, which in turn could hurt exports, or (in case of a stabilization of the currency) to some bubbles in the national financial markets.

Economic Forecast for Switzerland
The Swiss economy made it relatively unscathed through the 2009 recession, and showed great recovery in 2010. Throughout the fiscal year 2010, the economy grew by 2.7%. Never-theless, we now see the first indications of a weakening. The economy did grow steadily during the 3rd quarter of 2010 (+0.7% compared with the previous quarter, and 3.1% compared with the corresponding quarter of the previous year). It was, however, not unexpected to note the first setbacks in exports. There is a clear tendency toward a fall in the export of goods (first decrease in the 3rd quarter). In the last few months, the economic surveys have shown the first signs of a (currently still mild) deterioration of companies' and consumers' moods and expectations.

The macro-economic situation in Switzerland (regarding growth, public finances, unemployment), which is relatively good in international comparison, has resulted (among other factors) in a significant appreciation of the Swiss franc on the foreign exchange markets. In the beginning, the appreciation was primarily to be seen against the euro, but has since this summer been seen against other important currencies (in particular the US dollar). The franc's trade-weighted actual exchange rate index was during the fall of 2010 at its highest level since the mid-nineties. Between August/September 2008 and November 2010, the appreciation, measured against the trade-weighted effective exchange rate index, amounted to 14%. According to previous experience, this strong appreciation should impede export growth in the coming quarters, especially if the international economic growth outlook remains relatively curbed.

As a result of the slowdown in international trade, the expert group forecasts an economic slowdown in Switzerland in 2011, as it did in its latest forecast in September. The forecast for GDP growth in 2011 is now 1.5% (1.2% were forecasted in September). The state of the domestic economy, which continues to remain solid, will be able to mitigate to a certain degree the export-driven slowdown. Private consumption, which experienced a slight slowdown in the last quarters, should be supported by higher wages and the - albeit slower - ongoing immigration. Furthermore, construction investors should also be able to profit from the low interest rates, although they have probably already reached the pick of their capacity and face increasing (capacity) constraints. For business investments, the subdued contract and earning prospects for the (export-oriented) companies could lead to a slowdown in 2011.

The prospects for 2012 are largely dependent on the state of the global economy and the exchange rate development. Assuming that the international economy slowly takes off, and that the franc does not undergo another round of appreciation, export growth in Switzerland could slowly accelerate again. The positive impulses of the export sector, however, usually impact the domestic economy only with a certain delay. For this reason, it should be expected that GDP growth for the year 2012 also will remain moderate (+1.9%). In addition, given the great uncertainties on the international financial markets, it remains to be seen whether the financial sector in Switzerland in the next years will be able to approximate the level of activity registered during the good years prior to the crisis (2004-2007).

The employment market situation in Switzerland in the year to date, however, has continuously improved. There was an increase in employment figures during the first three quarters, and the (seasonally adjusted) unemployment rate fell from 4.1% in the beginning of 2010 to 3.6% at the end of November. Although in the coming months, a further decline of the unemployment rate can be expected, in 2011 and 2012 however, the prospects for improvements on the employment market seem slim, if the economy slows down as expected. The annual unemployment rate average is forecast at 3.8% for 2010, 3.4% for 2011, and 3.4% as well for 2012.

Economic Risks
Negative risks of our forecasts mainly concern the international economic climate. These risks have increased during the last months. In first place, of course, stand the uncertainties surrounding a further escalation of the European debts crisis. In close second, however, the fragile condition of the US economy has to be mentioned. This has spurred the US Federal Reserve System to undertake another monetary policy expansion (Quantitative Easing II"), which, however, contains potential dangers in terms of new imbalances, e.g. new speculation bubbles on the financial markets, or an escalation in currency conflicts between countries. These weak points in the global economy mean that Switzerland stands at a risk of continued pressure on the Swiss franc. It would be a particularly unfavorable situation if the franc would continue to appreciate, seen in combination with a strong worsening of the international economy (e.g. a relapse in the euro area or USA in a recession).

On the contrary, there could be a positive chance that the robust domestic economy develops better than expected. During the last years, private consumption and construction investments have surprised positively, not least because of immigration that was higher than expected and because of the very low interest rates environment. We thus cannot rule out, therefore, that the Swiss domestic economy during the next two years could perform above expectations. A stronger (than expected) domestic economy represents the positive risk of our forecast, for 2012 as well.

* Four times a year, an expert group from the federal government publishes a forecast on the economic development in Switzerland. The current forecast from December 2010 will be commented upon in this media release. The "Trade Cycle Trends," published quarterly by SECO, appears in print as a supplement to the February, April, July, and October issues of the periodical "Die Volkswirtschaft" ( The issues may also be downloaded as PDF-files (

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