Swiss economy on knife-edge

Consumer spending has been keeping the economy out of recession Keystone Archive

A succession of ever more gloomy economic data has economists wondering whether Switzerland can avoid recession.

The Swiss economic story this year has been one of slowdown with revised downward forecasts for growth coming thick and fast.

The situation is in marked contrast to a year ago, when the Swiss economy experienced almost miraculous growth of three per cent, having been one of Western Europe’s greatest underachievers during the 1990s.

Unemployment fell to its lowest level for a decade and it seemed the country was back on the right track.

But that all seems a long time ago now.

The year has seen thousands of redundancies as companies scale back to face leaner times. Last month the jobless rate rose above two per cent for the first time in more than a year and a half.

On Thursday, the State Secretariat for Economic Affairs (Seco) in Bern said GDP grew by just 0.1 per cent in the third quarter compared with the previous three months.

It said that compared with the corresponding quarter last year, real growth from July to September was just 0.8 per cent.

Slowdown surprises economists

Although most economists agreed that the country could not sustain its 2000 growth rate, the scale of this year’s slowdown has taken many by surprise.

“The biggest frustration is that Europe has shown that it is not immune to the United States’ slowdown,” says Marcus Allenspach, an economist at Cantrade private bank.

“With European monetary union, it was pretended that Europe was now a bloc of its own with the result that its economic course would be the result of developments in Europe alone.”

He adds that many economists thought Europe had avoided the US mistake of over-investment in the new economy, and that growth would therefore outstrip the slowing US economy.

But the US has proved it is still the only economic as well as political superpower.

It may be a hackneyed phrase, but it remains true that when the US sneezes, Europe catches cold. And Switzerland is no more isolated than the euro-zone, with Germany being its biggest trading partner.

Europe mirrors US

Europe’s economic problems have mirrored those of the US, only with a time lag of between six and nine months.

In Switzerland, that means consumer spending remains strong, with third quarter growth of 2.2 per cent.

But, as in the US, it was capital expenditure which first screeched to a halt before going into freefall to show a third quarter decline of 1.3 per cent. Finally, exports decreased by 2.9 per cent, resulting in that lacklustre third-quarter growth rate of just 0.1 per cent.

Consumers are keeping the Swiss economy out of recession, just as American consumers did for their economy at the beginning of the year. But as the economy weakens, consumers might tighten their belts.

Switzerland is stagnating and could be in negative territory in the early part of next year.

“The difference between a growth rate of 0.1 per cent and a minus rate is not big,” explains Allenspach, “I believe private consumption will hold up but I don’t see any reason for capital expenditure to turn around.”

“We have huge cuts in capital investment at ABB, for example. We have the dismal situation at Swissair and we have prominent downsizing by several manufacturers.”

Negative growth rate

Allenspach expects a negative growth rate for the fourth quarter of 2001 and says that could be repeated in the first quarter of 2002. Two successive quarters of economic contraction is the technical definition of a recession.

But if Europe and Switzerland are slowly following the US into recession, the good news is that they could just as quickly emerge from the doldrums on America’s coat tails.

“We have a very clear fiscal stimulus package in the US compared to Europe and the US has been much more aggressive in cutting interest rates,” says Allenspach. “We have US interest rates of 1.75 per cent, with inflation around two per cent. In the euro-zone, we also have inflation of about two per cent but interest rates of 3.75 per cent.”

“Based on the fiscal stimulus and monetary impulses, I am confident for the US economy for the second half of next year.”

Swiss interest rates are more in line with those in the US, though, and Allenspach believes the country will be well placed to benefit from a US upturn, which most economists believe is already underway.

The Swiss National Bank is still forecasting a growth rate of one per cent for next year as a whole but has not ruled out further interest rate cuts should the economy show further signs of faltering.

With the franc remaining stubbornly strong against the euro and exports continuing to fall, more cuts could be just around the corner.

And if the time lag with the US remains true, we could be well into 2003 before the Swiss economy has really recovered.

by Michael Hollingdale