The Swiss Economy Set for Stagnation in 2012
16.12.11 17:41

The Swiss economy will be developing at a snail's pace in the coming year. Following negative growth rates in winter, the GDP will be virtually stagnating at 0.2% on a year on year basis in 2012.Exports and investments in machinery and equipment will develop only slowly, but private and government consumption as well as construction investments will act to buttresses the Swiss GDP. Unemployment will climb to 3.3%.


International Economy: Bleak outlook

Ever since the KOF September Forecast, global economic conditions have degraded considerably. Europe in particular had to revise its growth expectations sharply downwards. The debt crisis and its consequences have stifled demand worldwide. The impact is making itself felt even in East Asia, which has long been developing dynamically and is increasingly important for Swiss exporters. The only ray of light came from the USA, which deve - loped somewhat better than we expected in autumn. Overall, the KOF expects a distinctly weaker growth rate for the Gross Domestic Product (GDP) in winter 2011/12 in Switzerland's most important export destinations, and a tentative recovery as of the coming year. This assumes, however, that the debt crisis in Europe will not worsen.


The Swiss Economy in Stagnation

The weaker economic development and the persisting strength of the Swiss franc will dent the Swiss economy in the coming year. During both winter quarters – the 4th quarter 2011 and the 1st quarter 2012 – Switzerland will even slip into a slight recession technically speaking, with two consecutive negative quarterly GDP growth rates. Due to the distinctly weaker second half-year, the KOF is lowering its forecast for 2011 from 2.3% to 1.8%. Stagnation is expected for 2012: The GDP growth will only reach 0.2% (KOF Autumn Forecast: 1.5%).


Hardly Any Stimulus from Foreign Trade

Exports, which long experienced robust development, were unable to hold up to the pressure of the strong franc and dwindling foreign demand. Most affected was the tourism industry, where the impact of exchange rate fluctuations is felt quickly. Tourism exports have been shrinking since the 4th quarter 2010. Exports of goods and services followed with a delay. Overall exports have been diminishing since the second quarter of 2011. This development will continue until the end of 2011. Exports will grow slightly during the first half of 2012. Stronger global economic momentum as of the middle of 2012 will coincide with a successively higher growth, so exports in 2012 will grow slightly, namely by 0.8%. Since imports will be growing faster at the same time – at a rate of 2.6% – the trade balance will decline in 2012.


Lower Investments in Machinery and Equipment – Stable Construction Investments

When it comes to investing, companies are reluctant due to the pessimistic sales outlook. And this is in spite of the fact that the strong franc is forcing companies to commit to rationalisation measures, that the price of investment goods are declining, and that the financing costs are favourable because of low interest rates. The decline in investments in machinery and equipment, which began in the 2nd quarter of 2011, should continue into the coming year. Renewed growth is only expected as of the 4th quarter 2012. For 2012 as a whole, investments in machinery and equipment will drop by 1.4%. Investments in construction will experience a better development – vigorous residential construction will be the main factor in the overall positive growth figures for construction (1.8%).


Unemployment Continues to Climb

The economic frailty will have an impact on employment without much delay. Since the 3rd quarter 2011, employment, converted to full-time units, has been in decline. For some com - panies, the strong franc is raising the question of how competitive Switzerland can be as a location in the long term. There is an increasing chance of structural adjustments being made in light of the changing currency conditions. The KOF is expecting 13,000 jobs to be lost by the 2nd quarter 2012; the subsequent recovery on the labour market will be modest. The annual average unemployment rate for 2012 will stand at 3.3% – still quite a low level by international comparison.


Strong Franc Remains an Issue

The lower-bound exchange rate of CHF 1.20 to the euro set by the Swiss National Bank (SNB) did give Swiss companies greater planning certainty, but price pressures still remain con - siderable. A further lowering of the exchange rate to 1.30, as is being demanded from various sides, could necessitate massive intervention in the currency markets by the SNB in the light of the instability in the euro zone – with the corresponding risks of inflation in the long term. Since the crisis in the euro zone is due to a structural problem, economic policy measures do not hold much promise. The orientation of fiscal policies in the next two years, however, will presumably have a slightly supportive effect.


Worries About the Eurozone

The main risk in the current forecast lies in the development of the euro zone. At the present time, three possible options are being discussed in Europe. Greater intervention by the European Central Bank (ECB), creation of a fiscal union – considered at the EU summit on 8/9 December 2011 – or increased aid from the International Monetary Fund (IMF). All three options are difficult to push through, but at least one of them will (have to) be implemented. Further intensification of the debt crisis would continue stifling the European economy and, by the same token, renew upward pressure on the Swiss franc. The latter scenario would result in a deeper and longer recessionary phase for the Swiss economy.

 
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