Swiss economy negotiates difficult path

Demand for houses is pushing up prices Keystone

The Swiss economy will pick up more than expected this year, but then run into the buffers of the falling euro in 2011, according to the latest official forecast.

This content was published on June 8, 2010 - 21:51

The economic climate looks brighter for Switzerland than most of Europe, with an upturn for manufacturers and consumer sentiment still high. But the struggling euro and a surging housing market give some cause for concern.

On Tuesday, the State Secretariat for Economic Affairs (Seco) revised its prediction for gross domestic product (GDP) growth this year from 1.4 per cent to 1.8 per cent. At the same time, it downgraded growth for 2011 from 2 per cent to 1.6 per cent.

Unemployment figures for the month of May fell 0.2 per cent to 3.8 per cent – showing the employment market in Switzerland is significantly better than in the rest of Europe.

The better news for 2010 was mirrored by Swissmem, the umbrella group for the electrical and mechanical engineering industries, that heralded a 22 per cent growth in orders. “After 15 hard months, prospects… are looking up again,” Swissmem stated at the end of last month.

Also on the positive side, a survey of small and medium-sized enterprises by UBS showed an improvement in trading conditions in the first quarter, while separate data from the bank showed an acceleration of consumer spending in April.

General business sentiment is also increasing with the KOF Swiss Economic Institute’s latest economic barometer – measuring expectations from a broad range of industry sectors – showing that most firms forecast more promising times ahead.

Sovereign debt

However, beneath the surface of the apparently improving economic conditions lurk a few demons that are expected to weigh on Swiss firms next year. The most troubling problem is that of European government debt pulling down the value of the euro, which would make Swiss exports more expensive for its biggest market.

“It is hardly possible for the Swiss economy to outpace that of Europe in the long term,” Bank Sarasin economist Alessandro Bee told “Exports are so heavily directed at Europe that the weak euro will level out growth next year.”

Swissmem reported last month that the main driver for improved orders for its members was the steadily growing Asian market. The organisation warned that the euro’s fall to SFr1.40 was damaging margins.

“If the euro exchange rate persists at today’s level for long, it cannot be ruled out that numerous enterprises will find themselves forced to shift at least portions of their production abroad in order to survive,” Swissmem stated.

The Swiss National Bank’s efforts to stabilise exchange rates by buying up large reserves of euros could also come with a downside, according to KOF. “To block inflationary trends, this development needs to be defused,” it warned in a recent bulletin.

But Alessandro Bee believes that core inflation rates – stripping out the effect of oil prices - will remain steady at between 0-1 per cent for the time being.

Housing bubble?

Economic think tank Avenir Suisse is worried that such low interest rates could result in the buoyant housing market spiralling out of control in areas such as Zurich, Geneva and Basel.

Unlike many other countries, Switzerland’s housing market resisted the economic crash and remains strong. House prices have risen to 1990 levels in Zurich and interest rates are likely to remain low for some time.

In the late 1980s house prices reached unsustainable levels and, coupled with low interest rates and relaxed lending attitudes, resulted in a real estate crash.

Current house prices in Zurich are about 20 per cent lower than 1990 when accounting for inflation, according to Aviner Suisse's Patrik Schellenbauer, but they are at the same level in nominal terms.

“We do not yet have a bubble, but there is the right cocktail of low interest rates, immigration of highly skilled workers and investment opportunities,” Schellenbauer told

“With foreign investment opportunities looking so poor at the moment, it is possible that institutional investors, such as pension funds, could place more funds into the domestic market, particularly real estate.”

The potential problem has also attracted the attention of Swiss National Bank (SNB) chairman Phillip Hildebrand, who recently warned banks not to get carried away issuing mortgage loans.

“It has not happened yet, but banks could be tempted into lowering their credit standards with increasing competition and shrinking margins,” Schellenbauer said. “The SNB cannot raise interest rates to cool off the property market while the franc is appreciating.”

Matthew Allen,

Economic forecasts

Switzerland’s GDP growth predictions compare favourably to European neighbours, but Asian economies and the United States economy are expected to rise faster.

Switzerland (latest Seco figures): 1.8% 2010, 1.6% 2011
Britain: 1.3%, 2.1%
Germany: 1.7% 2010, 1.6% 2011
France: 1.4% 2010, 1.4% 2011
Italy: 0.9% 2010, 1.1% 2011
Greece: -4.6% 2010, -4.1% 2011
Spain -0.4% 2010, +0.6% 2011
US: 3.3% 2010, 3% 2011
Japan: 2.7% 2010, 1.7% 2011
China: 9.9%2010, 8.1% 2011
India: 7.7% 2010, 8% 2011

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