Weak franc spells good news for economy

A lot of Swiss goods are shipped from Basel's port along the Rhine

Switzerland's economy will continue to benefit this year from a weak franc and strong growth in the euro zone, according to a leading economic research institute.

This content was published on May 25, 2007 - 16:17

The KOF Swiss Economic Institute in Zurich said on Friday that the export sector would see the most gain while warning that further interest rate rises were likely.

The KOF barometer, which looks ahead to the economy's performance in six month's time, rose to 1.96 points from 1.90 points in April.

"The Swiss economy is expected to see a modest rise in the pace of growth," the institute said in a statement. "[However] the momentum of growth is not expected to be particularly robust."

It said there was a downward trend for the industries and services included in its "core GDP module", including construction and banking, but the indicator was boosted by the strength of exports to the European Union.

"The bigger story behind this one is that Swiss business confidence is rising gradually towards the very high German level," a Bank of America analyst told Reuters news agency.

Germany is Switzerland's single most important export market, and Swiss goods remain attractive as the franc is at an eight-and-a-half year low against the euro.

The franc has been pushed down by a low short-term benchmark interest rate of 2.25 per cent. Investors are borrowing the Swiss currency to invest in higher-yielding assets.

Franc concern

But analysts say the weak franc has become a concern for the Swiss National Bank (SNB), which has stepped up its warnings against inflationary effects and the risk of a sudden re-appreciation.

The bank has said the value of the franc would be one of the main issues to be discussed at a policy meeting in mid June.

The SNB is widely expected to continue its series of quarterly 25 basis point rate increases in June despite ultra-low inflation rates.

The bank has said it expects Swiss growth to slow to around two per cent in 2007 from the six-year high of 2.7 per cent last year.

swissinfo with agencies

Key facts

Growth forecasts for the Swiss economy in 2007:
BAK Basel Economics: 2.1%
State Secretariat for Economic Affairs (Seco): 2%
Swiss National Bank (SNB): 2%
KOF: 2.4%
UBS: 1.5%
Credit Suisse Group: 2%
OECD: 2.1%

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