THE government has raised its forecast for Swiss economic growth for this year but warns the outlook for 2008 has become uncertain as a result of the credit crisis. The State Secretariat for Economic Affairs (Seco) forecast of 2.6 per cent for 2007 – up from 2.3 per cent – is slightly higher than that of the Credit Suisse bank. Seco based its statement on the healthy growth of export-oriented industries and the financial sector, as well as robust domestic consumer demand in the first half of this year. For 2008, Seco continues to forecast a slowdown to 1.9 per cent, but the risks have increased.

Economic experts at Switzerland’s second-largest bank, Credit Suisse, have increased their outlook for 2007 to 2.5 per cent, up from 2.2 per cent. They left the forecast for 2008 at 1.9 per cent as a result of a further slackening of growth momentum. However, this year’s growth rate will not reach the peak level of last year. It nonetheless remains considerably above the country’s potential growth of close to two per cent. The bank expects the slowdown of the global economy, the credit market turmoil and the sharp rise in oil prices to have only a moderate effect on the Swiss economy.

The slowdown should even be considered welcome in view of a number of indicators suggesting that the economy has been overheating. The KOF Swiss Economic Institute was the first to reveal its autumn economic forecasts. It sees economic growth of 2.8 per cent this year and 1.9 per cent in 2008. Experts forecast the current growth rate will shrink gradually by the end of the year as a result of weaker exports, but they don’t expect the turmoil on the financial markets to have a real impact on the Swiss economy.

The institute said gross domestic product (GDP) would increase 2.8 per cent this year but it cut its growth prediction for 2008 from 2.5 to 1.9 per cent. For 2009 KOF sees growth at two per cent. The peak was probably reached around the middle of this year. The available indicators and surveys show sustained and broad-based economic growth. The rate of export growth, however, has slowed down lately and construction is stagnating at a high level.

Credit crunch: Seco chief economist said it remained difficult to gauge the impact of the credit crunch in the wake of the meltdown in the United States subprime mortgage market. According to him, gross domestic product in Switzerland was unlikely to be affected in the short term, but he pointed out that rising oil prices could dampen consumer spending. Central banks had reacted quickly and had cushioned most of the problems in the interbank market, adding that the subprime crisis would hurt growth in the United States and dampen US demand, but the impact on Europe would be limited.

Experts say domestic demand should continue into 2008. It has supported the economic upswing, which began after a brief recession in 2003 and was driven by export-oriented manufacturing industries and the financial sector. Credit Suisse says the rapid production pace – added to a shortage of highly qualified workers – would stoke inflation in the medium term. Inflation is projected to stay low throughout the projection period, though pushing up somewhat in 2008. It is expected to average 0.6 per cent this year and 1.2 per cent in 2008.

The Zurich-based institute says there are hardly any signs of inflation on the horizon and the Swiss National Bank (SNB) is not likely to raise interest rates further. Neither tensions on the goods market nor the weakening of the Swiss franc have caused prices to rise any faster. Seco expects the jobless figure to stagnate next month as school leavers and graduates hit the market. It added unemployment would continue to drop to 2.7 per cent by the end of the year and to 2.4 per cent in 2008.

According to KOF, the unemployment rate – currently at 2.7 per cent - will continue dropping to 2.2 per cent next year, But is says that the strong growth in employment will cause only a modest increase in productivity. The jobless rate has now dropped to 2.5 per cent from 3.1 per cent at the start of the year, but some experts say the situation is not as rosy as the figures suggest, but last month it revised down its forecasts, predicting an unemployment rate of 2.4 per cent for 2008.

A sharp rise in employment and a drop in joblessness have been observed in all sectors, professions, regions and age groups. Switzerland has one of the highest levels of social integration in the workforce in Europe, which in turn means lower social expenditure. In Switzerland labour market participation stands at around 60 per cent of the population, whereas in France and Belgium the figure is nearer 50 per cent. According to the Organisation for Economic Cooperation and Development (OECD), Switzerland has the world’s second-highest employment rate (78 per cent) in terms of the working population aged 15-64. The OECD average is 65 per cent.

Germany

GERMANY, the eurozone’s biggest economy, is set for a sharp slowdown next year, a panel of top economists warned, stressing that the government should carry through with unpopular reforms. In their traditional autumn report, a panel of independent economic advisors to the government, forecast 2008 growth of 1.9, well off the 2.6 per cent pace expected this year. The panel’s assessment was more pessimistic than that of the government, which officially expects the economy to expand by 2.0 percent in 2008.

As a result, the experts warned Chancellor Angela Merkel’s cabinet not to abandon unpopular reforms initiated by her predecessor Gerhard Schroeder, as legislative elections scheduled in 2009 drew near. The advisors stressed that Germany’s strong economic performance since 2005 was in large part “the consequence of deep, widespread reforms that aimed to adapt (the economy) to reinforced international competition.” Germany’s ruling coalition of conservatives and social democrats is now mulling an extension of unemployment benefits that were sharply cut back by a plan launched by Schroeder.

The experts criticised the government’s position, warning that it lacked a clear strategy on economic policy and risked falling prey to lobbying activism. Meanwhile, economy ministry figures showed industrial production had edged higher in September from the previous month, surprising analysts and locking in a solid performance for the third quarter of the year. Monthly growth of 0.3 gave a quarterly figure of 2.1 per cent, the best result since the second quarter of 2006.

But another survey showed that factory orders dropped in September, and taken along with other leading indicators suggested the third quarter would probably be the last to see strong growth for some time. It seems likely that industrial growth will slow pretty sharply in the coming months and the onus will shift to household. The most important factors of a slowdown will come from abroad” and forecast stronger domestic demand, although German consumers are notoriously reluctant to spend freely.

Germany’s export-oriented economy is vulnerable to a slump of the key US market, high energy prices and the rising euro, which hit a fresh record of $1.4731. As the economy strengthened and government accounts improved, many politicians have begun to suggest it is time to share the wealth with those who had not found jobs or otherwise benefited amid the upturn. Now, however, it looks like the economic good times are fading fast and that yet more rigour will be called for.

Forecast: The country’s top economic institutes are raising their forecast for economic growth this year by two thirds, which could mean a higher tax take, stronger domestic demand and lower unemployment. The current upturn will continue, but the pace of expansion will be slower than last year. A key reason for this is restrictive fiscal policy, which is likely to knock around half a percentage point of gross domestic product (GDP) growth. And the European Central Bank, too, is switching to neutral in its monetary policy. The tighter monetary conditions would not hamper robust economic expansion, since long-term interest rates remain comparatively low.

The strong economic performance would lead to an improvement on the labor market, with the annual average jobless total set to fall below four million for the first time since 2001. The jobless total would fall to 3.77 million in 2007 from 4.49 million in 2006 and then decline to further to 3.47 million in 2008, the institutes said. The jobless rate, which measures the total number of unemployed as a proportion of the working population as a whole, was projected to decline from 10.3 in 2006 to 8.7 in 2007 and eight per cent in 2008.

The robust economy would also have a positive effect on German debts, pushing the public deficit down from 1.7 of GDP in 2006 to just 0.6 per cent of GDP in 2007. Germany was expected to achieve a balanced budget, or a deficit ratio of zero, in 2008, according to the report. Under the terms of the European Stability and Growth Pact, eurozone members are not allowed to run up public deficits in excess of three per cent of GDP. But Germany, the main architect of the pact, was in breach of the 3.0-percent rule every year between 2002 and 2005.