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Swiss Economy Now Expected to Grow 1.9% in 2011

Credit Suisse raises its 2011 economic forecast

With world economic growth remaining stable, the Swiss economy will have a smoother ride in 2011. Credit Suisse economists are now forecasting growth of 1.9% (previously 1.2%) for the Swiss economy in 2011. Many of the risks factored into their July 2010 growth forecast – for example weak growth in the US, turmoil in the euro zone, and inflation coupled with a potential property crash in China – are likely to have less of an impact, if any, on the Swiss economy in 2011. In addition, the occasional turbulence still seen on the financial markets is having less and less effect on the real economy. While the stronger franc is likely to have negative repercussions in terms of net exports, indirectly it should underpin investment because it means interest rates will remain low.

Demand for Swiss products remained high in 2011, compensating for the negative effects of the strong franc on prices. In their revised forecast, Credit Suisse economists still expect exports to increase by 3.5% in 2011. At the same time, favorable financing terms will stimulate investment in the Swiss economy, especially as Swiss companies are working at above-average levels of capacity thanks to a surprisingly speedy recovery in demand. Credit Suisse economists predict 3.5% growth in capital spending on machinery and equipment (previously 2.5%).

The construction industry is also deriving greater benefit than previously anticipated from the low level of interest rates, suggesting that 2011 will see the same record volumes of construction as last year (previous forecast was a decline of 2.0%). The economists predict 1.7% growth in consumer spending, also higher than the previous forecast of 1.2%, thanks primarily to the sustained high level of immigration, but also to economic recovery. Furthermore, the situation on the labor market should continue to ease. By contrast, a larger proportion of domestic demand will be satisfied by imported goods, whose prices are more attractive thanks to the strong franc. Imports are now predicted to grow 4% in 2011 (previously 3.5%).

This improvement in the economic outlook is accompanied, however, by growing structural risks. The danger of economic mismanagement has mounted in the wake of the latest rescue and fiscal packages in Europe and the US. Not only this, but as the recovery continues and given the immense amounts of cash flooding the economy, it will be harder and harder to strike the right monetary balance between low interest rates and growing inflationary risks.

Inflation looks set to be higher this year than previously predicted. Rising commodity prices will also impact Swiss consumer prices. Credit Suisse economists are now forecasting inflation of 1.1% for the year (versus 0.7% previously).