IMF says Swiss economy on right track

The International Monetary Fund says Switzerland’s economy is on a positive track. Activity is strengthening, unemployment has declined rapidly and inflation is low.

The International Monetary Fund says Switzerland’s economy is on a positive track. Activity is strengthening, unemployment has declined rapidly and inflation is low.

In its annual examination of the Swiss economy, the IMF says the policy task now is to provide conditions for a continued upswing with low inflation.

Looking forward, improving external conditions and positive domestic fundamentals should underpin a pickup in Swiss GDP growth in the near term from 1 1/4 percent in 1999 to about 2 percent in 2000.

But the prospect of above-trend growth for the Swiss economy raises the question of the degree of slack in the economy and the possible emergence of inflationary pressures, says the IMF.

As far as monetary policy is concerned, the IMF says that the Swiss National Bank will need to retain the option to react to exchange rate disturbances. While retaining monetary autonomy could allow Switzerland to continue enjoying relatively low interest rates, it may imply accepting greater market fluctuation of the Swiss franc against the euro than so far observed.

Recent fiscal developments have been encouraging, says the IMF, with the general government deficit (now projected for 1999 at about 1 ½ percent of GDP) falling below initial expectations, despite additional spending needed for Swiss involvement in resolving the Kosovo crisis.

On current projections, policies are on track to observe the constitutional limit on the budget deficit of the confederation next year and the objective of balance in 2001 can be met with some additional expenditure savings.

The IMF warns that continued commitment to this objective is important for confidence and the broad economic climate, and it is essential therefore to resist pressures to relax fiscal policies.

In a reaction, the Swiss National Bank says it strongly agrees with the IMF’s call for vigilance in the monetary policy area.

“As the Swiss economy continues to recover, the inflationary pressures are likely to strengthen to some extent,” said a director Georg Rich.

He added: “For this reason, the SNB allowed Swiss short-term interest rates to rise in October, a few weeks before the European Central Bank tightened its monetary policy.