The Swiss government warned on Tuesday that safe-haven demand could push the strong Swiss franc still higher and seriously threaten growth as it cut its forecast for economic expansion in 2012. While it stuck with a forecast for 2.1 percent growth this year, the State Secretariat for Economics (SECO) reduced its forecast for 2012 to 1.5 percent from 1.9 percent in March and lowered its forecasts for inflation to 0.7 percent for this year and next.
"In the light of the diverse global economic weaknesses and numerous uncertainties, the Swiss economy continues to face the risk of a further appreciation of the currency," it said in a statement. "An additional strong pressure on the Swiss franc would however jeopardise economic growth to a serious degree."
The Swiss National Bank (SNB) will likely strike a similar chord when it issues its new growth and inflation forecasts during its quarterly monetary policy review on Thursday. "We don't expect the central bank to turn more hawkish on account of the strong franc and subdued inflation," said Credit Suisse analyst Shivani Tharmaratnam. "We think the SNB will reflect an unchanged policy outlook, pointing to the euro area fiscal stress and franc strength as threats to exports and growth going forward." Although the Alpine economy is performing well - with low joblessness and robust consumer spending - the SNB is widely expected to keep rates on hold at ultra-low levels for fear of driving the franc still higher.
The franc has soared to records against both the euro and the dollar in the past two weeks, building upon double-digit appreciation against both currencies last year, and the central bank has warned growth could slow as exports suffer. The recent resilience of Swiss exports was largely due to strong demand, particularly from emerging markets, the United States and Germany, the SECO said, but companies were already being forced to cut margins due to the strong franc.
There have been signs in recent months that growth in those economies is peaking and economists are increasingly concerned about the outlook for growth in the United States. "Should the upward pressure on the Swiss franc persist, significant negative effects on export volumes can be expected in 2011 and 2012," the SECO said, forecasting unemployment to rise slightly to 3.3 percent in 2012 from 3.1 percent in 2011.
The expert group that drew up the government forecast said the real effective exchange rate of the Swiss franc against a weighted basket of currencies had now reached an all-time high, significantly higher than a peak reached in the mid 1990s. "Given the growing doubts about the sustainability of high level of sovereign debt, the expert group assumes that the demand for safe currencies should continue," they said. The SECO also said strong domestic demand - particularly booming construction - has helped drive the economy. While it expects private consumption to continue to drive growth, it sees slowing foreign demand dampening capital spending.