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Swiss economy needs more time to recover

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UBS economists are expecting economic growth in Switzerland to remain extremely modest at 1.3% in 2003. Given the tentative recovery in exports and the subdued outlook for sales and earnings, it will be some time before business investment picks up again. Private consumption - which has buoyed the economy until now - will not collapse, but will certainly lose momentum as the labour market situation continues to deteriorate.

Against the backdrop of heightened risks to the global economy and turbulence on the financial markets, there have been mounting signs over the last few months that in Switzerland, too, economic recovery will not kick in quite as soon as expected. Based on the latest data, UBS has revised its forecasts for the Swiss economy. Growth will remain weak for several quarters to come and is unlikely to improve substantially until later next year. Economists at UBS are now forecasting a 0.4% increase in GDP for 2002 (previously 1.0%) and 1.3% for 2003 (previously 1.8%). A prolonged downturn similar to the first half of the nineties is unlikely, however, given the structurally sound position of the Swiss economy. A more upbeat global economic environment will spark a business revival in 2004 (GDP: 2.3%).

Both foreign and domestic factors play a key role in the revised forecasts. Exports continue to languish under the extremely sluggish economic conditions in Europe - particularly in Germany - and the fragile US economy. On top of this, the Swiss franc remains high. In view of the subdued sales and earnings outlook, business investment is unlikely to pick up for a while yet. Private consumption has provided the main support for the economy until now, but although consumer confidence will not evaporate, it will certainly lose momentum. Contributing to this slowdown is the fact that unemployment is set to rise further and will exceed the 3% mark for some time to come. As the slump in the economy is proving more pronounced than expected, many companies have still not finished adjusting staffing levels. The Swiss economy will not see a sustained recovery until the second half of 2003 - triggered as usual by exports - when the international economic environment starts to improve.

Weak growth means that the risk of inflation remains low, despite further fluctuations in the oil price. Thus the Swiss National Bank (SNB) will probably maintain its current low interest rate for some time. If the franc comes under massive upward pressure again on the currency markets, it may even reduce further the target band for interest rates. The SNB will not start tightening the monetary reins until the economic recovery has gained a foothold, i.e. in around a year's time.

Economic indicators Switzerland

Real year-on-year percentage change

P: UBS projected figures; YE: year-end

Zurich / Basel, 13 September 2002