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Switzerland will dodge deep slump, government economist says

[ZURICH] Switzerland's economy will avoid a deep slump as domestic demand helps counter pressure on exports from the stronger franc, the government's chief economist said.

"At the moment I believe the risk of us getting into a deep recession is low," Eric Scheidegger, who heads the economic policy division at the State Secretariat for Economic Affairs, said in an interview in Bern.

Economic momentum is set to slow this year after the Swiss National Bank abolished its currency cap, and data two weeks ago showed output declined in the first three months of 2015. A contraction this quarter, as predicted by 90 per cent of economists in Bloomberg's most recent monthly poll, would put Switzerland in its first recession in six years.

"We can assume that it won't be a very good second quarter," Mr Scheidegger said in the interview on Wednesday, adding that buoyant private consumption and a strong construction industry were helping to offset weak trade.

The SECO forecasts growth of 0.9 per cent this year, less than half the rate it predicted before the franc cap of 1.20 per euro was scrapped in January. It sees expansion accelerating to 1.8 per cent next year. Consumer prices are set to fall 1 per cent in 2015, then climb 0.3 per cent in 2016.

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It will update its outlook on June 16, two days before the central bank's next rate decision. Mr Scheidegger said it's hard to say whether this quarter will be as bad as the first, when the economy shrank 0.2 per cent.

One reason for optimism, according to Mr Scheidegger, is that the global environment now is better than in 2011, when concern about a euro-area breakup led investors to flock to the franc, prompting the SNB to set its currency cap. A rising interest-rate differential with the euro area and the US as central banks there normalise their policies should eventually help weaken the franc, he said.

"We expect the US to develop positively, and the euro area is out of recession," he said. "There will be a stabilisation and a small improvement in the economic perspectives." The franc has climbed about 15 per cent against the euro this year and is up 7 per cent against the dollar. It stood little changed at 1.05285 per euro at 8:36 am in Zurich on Thursday, while against the dollar it was at 93.04 centimes.

"The appreciation of the franc is very strong, but it can't be lasting - there's got to be a correction when you have such a strong move away from the long-term average and purchasing power parity," Mr Scheidegger said. "What economists can't say is the exact point in time when that will happen."

One key variable in that equation is Greece, under pressure to meet creditor demands in return for funds to prevent a default. Were Greece to give up the euro - dubbed a "Grexit" - that could cause more financial-market turbulence and a run on assets perceived as safe.

"It's to be expected that pressure on the Swiss franc should rise given its role as a safe haven," he said. "What's important is how a Grexit is managed, how much of a surprise it is or whether it's the result of months of muddling through."


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