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Swiss economy to avoid recession: economists

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Swiss economy to avoid recession: economists
Photo: Fabrice Coffrini/AFP
10:42 CET+01:00
Economists say the Swiss economy will slow down significantly but fall short of a recession this year following Thursday’s decision by the central bank to scrap its franc-euro exchange rate peg.

The impact of the decision, which has sent the franc soaring to near parity with the euro from 83 cents, will cut expected economic growth to 0.5 percent for 2015, UBS Wealth Management said in a report.

That’s down from the previously forecast 1.8 percent and considerably below the 1.9 to two percent rate estimated for 2014.

The UBS unit said it expects Switzerland’s Gross Domestic Product to expand by only 1.1 percent in 2016 versus the 1.7 percent rate forecast before the Swiss National Bank abandoned its efforts, undertaken for more than three years, to prevent the franc from appreciating in value.

Swiss exporters will feel the pain worst, along with sectors such as the tourism industry and retailers near the French, German and Italian borders.

The low value of the euro is expected to further boost cross-border shopping by Swiss consumers with higher purchasing power because of the franc.

Economists say the eurozone’s economy is expected to pick up in the second half of this year, which should help Swiss exporters.

But UBS said it expects overall exports to dip by one percent this year compared to 2014.

Research group BAK Basel Economics predicts slower economic growth as well as a jump in unemployment to between 3.6 percent and 3.8 percent next year, compared to a previously forecast rate of 3.1 percent.

The group said it is unlikely that the euro will return to a level of 1.20 francs in the next couple of years and it has based its forecasts on a rate of 1.05 francs.

The biggest losers from the strong franc will be the machine industry, mechanical engineering, automotive suppliers, chemical, pharmaceutical, textile and hotel industries, the Zurich economic institute KOF said.

Some industries will gain from the cost reduction from goods imported from the euro area, the institute, attached to the federal institute of technology in Zurich (ETH), said.

Economists at KOF, like others in Switzerland, said they were surprised by the SNB’s move.

The institute echoed the views of other observers in noting that the decision threatens the central bank’s credibility and trust.

In the eyes of many market participants the SNB broke an “implicit promise” after stating that it would defend the 1.20-franc euro floor introduced in September 2011, KOF said in a report.

By choosing to scrap this exchange rate at a time when the franc was under pressure the central bank gives the impression of having yielded to outside forces, it said.

Many economists also highlighted the fact that Switzerland is now facing deflation or “negative inflation”.

Mortgage rates, already at historic lows, are expected to fall even further after the SNB cut its reference rate to minus 0.75 percent from minus 0.25 percent for financial institutions.

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