Institute disputes forecasts of Swiss rebound

Recession in Switzerland will last well into next year, says a Lausanne economic think tank that is taking a sharply more pessimistic view of the future than the Swiss government and the major Swiss forecasters.

The Créa institute, attached to the University of Lausanne, predicts that Switzerland’s economy will continue to shrink in 2010 with negative growth of minus 0.4 percent, following an anticipated 2.5 percent drop in the country’s Gross Domestic Product for 2009.

“We are expecting a U-shaped recession,” Créa economist Délia Nilles told Swisster after the group released its latest report on Monday.

Unlike a V-shaped recession where a sharp contraction in the economy is followed by a rapid recovery “this is not as deep but it will last a bit longer,” Nilles said. “There will be two years of recession, if you define it by negative growth.”

Créa’s outlook clashes with predictions offered by the federal government and other forecasting agencies who expect the Swiss GDP will start growing again next year.

But it's not the first time the Lausanne institute has gone against the grain. In October 2008, Créa was the first group to predict that Switzerland would head into recession when others were continuing to see expansion ahead.

Seco, the government’s secretariat on the economy, last month projected 0.4 percent growth in 2010, while Credit Suisse called for a 0.6 percent improvement and UBS in September predicted a 1.7 percent expansion, along with Pictet bank.

KOF, based at the Federal Institute of Technology in Zurich, last month forecast a 0.1 percent increase in GDP, while Basel-based research group BAK called for 0.5 percent growth.

The major forecasting groups have recently issued wildly different forecasts for the current year. All agree the country is in a recession but prognostications for 2009 range from minus 1.5 percent growth envisaged by UBS to the 3.4 percent contraction expected by KOF.

Nilles believes the disparities are largely attributable to differing analyses of consumer spending. “Many institutes are talking about a quick recovery, but I think they are forgetting about the labour market,” she said.

Créa sees jobless rates rising to 5.5 percent next year (higher than the 5.1-5.2 percent that other forecasters are expecting) and shooting up to 6.3 percent in 2011. Nilles said the higher unemployment and wage freezes will start to impact private consumption, which accounts for about 60 percent of the Swiss GDP.

Consumer spending so far this year has held up better than Créa expected (in the spring the institute predicted the Swiss economy would contract by 3.2 percent for 2009). But recent indicators show that expenditures are falling, Nilles said.

Swiss exporters continue to face slumping order books in the face of an international economic situation that remains difficult, she said. A recent survey of 420 companies by UBS indicated that they do not see any improvement in the coming months and layoffs are expected to accelerate.

One worrying prospect is the fact that stimulus packages to contend with the financial crisis in the US, Britain and other European countries will soon come to an end, Nilles said.

These programmes have served to dampen the impact of economic problems, and could leave Swiss exporters open to further challenges, she indicated. The construction industry also looks sets to face a major downturn with builders reducing the number of buildings, including planned houses.

Real estate prices have remained high in Switzerland, a result of demand outstripping supply, Nilles said. That may not change if construction companies build fewer homes, she said.

Créa is predicting that interest rates will remain low in 2010 along with the inflation rate, forecast at 0.4 percent following an expected rate of minus 0.6 percent for this year.

Last month, the Swiss government issued a report from a group of experts indicating that the global economy was recovering faster than expected, although it warned that the Swiss economy would “run out of steam”  in 2010.

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Swiss economy to run out of steam, says Bern