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Swiss Economy Set to Slide into Recession in 2009


International and Swiss Economic Forecasts for 2009 from Credit Suisse
Zurich.- The financial crisis that had been brewing for over a year finally impacted Switzerland’s real economy in late fall 2008. Until the end of October, the Swiss economy had held up considerably better than the economies of most other industrialized nations. But with the US, Japan and a host of European countries already in recession for several quarters, the Swiss economy was unlikely to defy the downward trend for much longer. The economists at Credit Suisse expect Switzerland’s gross domestic product (GDP) to decline by 0.6% in 2009. They forecast an inflation rate of 0.7%.

Fall 2008 saw a massive deterioration in the economic environment. Contrary to expectations, the risks forecast by Credit Suisse in September 2008 rapidly materialized as realities. The crisis on the financial and credit markets has continued to spread and has spilt over into the real economy. The current economic environment is dominated by major uncertainties stemming from a general loss of trust in the economy, and extremely volatile financial markets that have lost all sense of direction. This is reflected, for instance, by the new lows to which consumer sentiment and the investment climate have plummeted. For that reason, the Credit Suisse economists are lowering their forecasts for 2009.

Weak Global Economic Growth
The US, Japan and a host of European nations have been in recession for several quarters. The recession is set to persist in the industrialized nations during 2009, whereas the emerging and developing countries will continue to grow, making them the only contributors to world economic growth. Following a drastic deterioration in economic activity in the fourth quarter, the latest leading indicators, such as the majority of purchasing managers indices (PMIs), for example, are at least showing signs of a stabilization. The Credit Suisse economists nevertheless assume that global economic growth will remain weak for several quarters to come.

Oil and commodity prices have nose-dived since summer 2008, leading to a marked decline in inflation rates. In some markets - especially in the US - inflation rates may even fall below zero per cent in the coming months. However, the Credit Suisse economists are not expecting widespread or even sustained price decreases. The risk of deflation should be averted by drastic interest rate cuts and by the future use of such room for maneuver as still exists, combined with wider-ranging monetary measures by some central banks such as the Fed in the US and the Bank of Japan (BoJ).

In the medium term, the gradual recovery of the global economy should be encouraged by sustained low interest rates over a lengthy period, extensive fiscal packages, and bank recapitalizations.

Swiss Economy: Declining Foreign Trade and Capital Investments
The Swiss economy still appeared to be robust until the end of October 2008. But in November, order book levels in industry literally collapsed overnight. Since then, the Swiss economy has no longer been able to escape the significant downward trend throughout the world. The macroeconomic contraction is expected to affect all demand components except for consumer spending. The Credit Suisse economists expect an overall decline of 0.6% in GDP during 2009.

The export sector is the most directly impacted by this negative development. Exports of goods will decline as a result of the recession in the purchasing countries, while those of financial services will be dragged down in the wake of the financial crisis. The increased value of the Swiss franc is likely to create additional problems for tourism in 2009. While exports to countries with continuing growth, such as China, will provide a sort of economic safety net, their share of overall exports is still not large enough to compensate for declining exports to the US and Europe. Switzerland’s export volume is therefore set to fall by a total of 2.3%.

Uncertainty Curbs Investments
Investments have already been declining for a long time due to the high level of uncertainty. Capital investments began to lose momentum back in April 2008, and this decline is likely to accelerate during 2009 in view of the discouraging income prospects. According to Credit Suisse’s revised forecast, capital investments represent the demand component that will experience the severest downturn. The Credit Suisse economists expect a decline of 5.3% for 2009 as a whole. Construction investments will also develop negatively, with a particularly sharp slowdown in commercial property construction (office, commercial and industrial buildings).

Support from Consumer Spending
By contrast, consumer spending will continue to be a source of support. The Credit Suisse economists forecast growth of 1.2% in 2009 for consumer spending, which has also proven to be largely stable during previous downturns. Numerous factors suggest that this will happen again during the current slump. On the one hand, many households can expect salaries to increase and on the other, consumer spending will benefit from welcome support thanks to immigration, which will remain high again in 2009. Pressure on household budgets will also be relieved as inflation eases. However, the unemployment rate will rise in 2009 to an average of 3.4% for the year. This is likely to restrict the growth of consumer spending.

Inflationary Threat Averted
The huge drop in oil and commodity prices has averted the threat of inflation. Demand-side inflationary pressure will also lessen as a result of the economic slowdown. Against this backdrop, the economists at Credit Suisse expect an inflation rate of 0.7% for 2009. The National Bank has already made use of the relevant scope for maneuver by announcing a severe and unusually rapid cut in interest rates. The guardians of the currency will also keep interest rates low in 2009, and will use every means at their disposal to ensure that the credit markets can continue to function.


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