US bank predicts Swiss stagnation

If the economy stagnates, more Swiss could be collecting unemployment benefits Keystone Archive

Switzerland is highly exposed to the current downturn in global economic activity and its economy is expected to stagnate next year, according to the United States investment bank, Goldman Sachs.

It is the first financial institution that is no longer counting on growth of Swiss Gross Domestic Product (GDP) next year.

In a study, the bank argues that recent shocks could hit the Swiss economy hard and, compared with Euroland, there is less potential for a rebound later.

Attacks affected economy

Economists at Goldman Sachs say that given their expectations that GDP will grow by only 0.6 per cent next year in Euroland, the Swiss economy is unlikely to see any growth at all between 2001 and 2002.

They add that before the terrorist attacks in the United States on September 11, they expected the Swiss economy to follow the Euroland downturn closely. However, they now say they are “more pessimistic”.

The study says the terror attacks have dampened activity directly in several important sectors of the economy – airlines, financial services and tourism.

These represent 14 per cent of GDP (12 per cent of employment), twice as much as in Germany and France.

Another reason for the pessimism is tighter monetary conditions in Switzerland.

Safe haven

Still, the study says that in times of uncertainty, Switzerland is often the recipient of substantial safe-haven flows. This occasion has proved no exception, with the Swiss franc appreciating by about three per cent against the euro since the attacks, it adds.

According to Goldman Sachs estimates, each one per cent increase in the Swiss franc/euro exchange rates tends to lower Swiss GDP by about 0.1 per cent relative to Euroland after one year.

The bank analysts also cite even tighter financial conditions for their pessimism. Since early 2000, the equity markets have fallen about 20 per cent in euros in Switzerland. This represents a loss in market capitalisation equivalent to about 60 per cent of Swiss GDP compared with 16 per cent of Euroland GDP, comments the study.

While a large part of the Swiss equity market is held by non-residents, household wealth in pension funds and banking sector activity will be adversely affected, it comments.

The study feels the relative weakness of the Swiss economy is unlikely to have a negative impact on the equity market because domestic cyclical factors have only a mild effect.

It points out that many major Swiss companies are multinationals with minor links to the Swiss domestic economy. Pharmaceuticals and non-cyclical consumer goods account for more than one half of Swiss market capitalisation.

These “defensive” sectors tend to perform well in a gloomy macroeconomic environment, it adds.

swissinfo with agencies