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Research institute offers mixed economic forecast

Goodbye Mr Schips: KOF director Bernd Schips will retire next year after a 12-year stint

(Keystone Archive)

One of Switzerland’s most influential research institutes has predicted that the Swiss economy will grow by 1.6 per cent this year.

But the KOF Institute for Business Cycle Research warned on Tuesday that growth would peak at the end of the year and lowered its forecast for 2005 to 1.8 per cent.

Five months ago, KOF forecast growth of 1.4 per cent this year and 1.9 per cent in 2005.

Earlier this month the Swiss National Bank (SNB) anticipated economic growth of “close to two per cent” in 2004.

“Switzerland has a small, open economy that is very much subject to international trends,” said KOF director Bernd Schips.

“We believe that growth rates in the United States and the European Union will decrease slightly, so expected growth for Switzerland will remain at around 1.5 per cent,” he told swissinfo.

Schips said he did not believe that the current rise in international oil prices would have a major impact on either economic growth or inflation rates.

“We believe that oil prices next year will stay at about the same level, at around $40 per barrel,” he said.

The KOF director said that oil prices were calculated internationally in US dollars, and that rises had less impact when translated into relatively strong currencies, such as the euro or Swiss franc.

Schips believes the franc is currently slightly undervalued, and will gain against both the dollar and the euro over the next couple of years.

Growing doubts

In its autumn report, KOF said that a rise in consumer demand could not be expected under the current economic conditions.

The forecast reflects growing doubts among economists about whether the Swiss economy can sustain its current rate of growth.

KOF researchers said they expected the SNB to leave key short-term interest rates unchanged for the rest of the year, before increasing them gradually to 1.5 per cent by the end of 2006.

The central bank raised interest rates by a quarter of a percentage point earlier this month, marking the second consecutive 25-basis-point rate increase within three months.

Commenting on fiscal policy, Schips said that the “expected reduction in public investments over the next few years” would be a mistake that has “already been made in the past”.

“Fiscal policy is not neutral – there is a negative impact on the whole economy if you try to reduce these deficits at a time of only moderate growth.”

Unemployment

Schips added that he expected unemployment would rise over the next year or two, reflecting an ongoing “disequilibrium” between demand for labour and the number of people seeking work.

Unemployment in Switzerland stood at 3.8 per cent in August.

The institute expects more jobs to be created in the services industry, but anticipates a continued decline in employment in the industrial sector.

An increase in productivity in the construction industry is expected to be too weak to create jobs.

swissinfo

Key facts

Earlier this month the Swiss National Bank anticipated economic growth of “close to two per cent” in 2004.
Five months ago, KOF forecast growth of 1.4 per cent this year and 1.9 per cent in 2005.
KOF says its latest forecast is less a complete revision than an update based on new data.

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In brief

KOF predicts that the Swiss economy will grow by 1.6 per cent this year, 1.8 per cent in 2005 and 1.5 per cent in 2006.

Exports are expected to grow by 7.6 per cent this year, 5.7 per cent in 2005 and 5.2 per cent in 2006.

The Zurich-based institute points out that Switzerland is a small, open economy that is subject to international trends.

end of infobox


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