2018.12.1802:36:00UTC+00SECO Slashes Swiss Growth Forecasts On Weak Domestic Demand

Switzerland's economy is set to expand this year and next at rates that are slower than expected earlier, mainly due to weak domestic demand, the State Secretariat for Economic Affairs showed on Tuesday.

Gross domestic product is forecast to grow 1.5 percent in 2019, which is less than the 2 percent expansion seen in September.

The growth projection for this year was lowered to 2.6 percent from 2.9 percent.

Last week, the Swiss National Bank projected GDP growth of around 2.5 percent for this year and nearly 1.5 percent for next year.

The SECO predicted 2020 economic growth at 1.7 percent. The agency expects domestic demand to pick up again only in 2020.

Both export and domestic economies are expected to return to moderate growth after a weak third quarter, when the economy contracted 0.2 percent.

However, the strong GDP growth rates logged in the first half of the year will no longer be achieved, the SECO said.

As the euro area is likely to slow slightly faster than estimated in the September forecast, foreign demand for Swiss products is set to flatten out and the export economy will lose momentum, the report said.

Consequently, capacity utilization will decline, prompting Swiss companies to raise investments less robustly than in 2018 and to go slow on hiring.

The situation in the labor market is expected to remain very good overall with the unemployment rate seen at 2.4 percent for next year.

Yet, private consumption is forecast to remain subdued in the first half of the forecast horizon as muted wage developments and positive inflation reduce households' purchasing power.

Inflation is forecast to remain low at 0.5 percent, mainly due to the recent drop in oil prices.

In 2020, domestic growth forces are expected gain in importance and bolster GDP growth, while stimulus from foreign trade weakens. Real wages are set to rise, boosting private consumption.

Meanwhile, the economic slowdown will reflect in the labor market and the jobless rate is expected to climb to 2.5 percent by 2020. Inflation is seen at 0.8 percent.

The Swiss franc could again face stronger upward pressure amid an intensification of capital outflows from emerging economies and currency fluctuations due to rising interest rates in the backdrop of a faster than expected monetary policy normalization.

In the event of a significant deterioration of the relationship between Switzerland and the EU, companies' investment activity will be hampered.

In view of simmering imbalances, the risk of a major correction in the Swiss real estate sector also remains, the SECO said.

On the other hand, the recent fall in oil prices may help the international and Swiss economies to pick up again, the agency added.