Swiss Economy Past Worst, Deflation Risks Eased, Gerber Says

By Klaus Wille and Simone Meier

Oct. 21 (Bloomberg) -- The Swiss economy is probably past the worst of the recession and deflation risks have eased, the government’s head of economic affairs said.

“The recession has probably bottomed out but the situation isn’t without risks,” Jean-Daniel Gerber, who heads the State Secretariat for Economic Affairs, said in an interview in his office in Bern on Oct. 19. “A double dip is possible but the second dip wouldn’t be as severe as the first one. The risk of deflation is much lower than before.”

The Swiss economy is recovering after the central bank cut borrowing costs close to zero and purchased corporate bonds and foreign currencies to fight the worst slump in three decades and combat deflation. Swiss leading economic indicators last month rose to the highest in more than a year and the state secretariat raised its outlook for the economy.

Gerber also said that Swiss National Bank President- designate Philipp Hildebrand is “right” that the country needs stronger bank regulations. Hildebrand, who takes over from Jean- Pierre Roth in January, has suggested options including restricting the size of banks and possibly breaking them up.

UBS AG, which received government aid last year, and Credit Suisse Group AG were both forced to eliminate jobs to help reverse record losses. Gerber said the size of the financial- services sector as a proportion of gross domestic product has fallen to around 10.5 percent from more than 12 percent in 2007.

“We have to strike a balance between strong banks and their size,” he said. “What’s important for Switzerland is that regulations are carried out in a way that all the players have to abide by similar regulations.”

‘Many Clouds’

The state secretariat, part of the Economy Ministry, said last month that it expects GDP to drop 1.7 percent this year and increase 0.4 percent in 2010. That compared with contractions of 2.7 percent and 0.4 percent, respectively, forecast in June.

With exports accounting for about half of GDP, Switzerland’s economy is dependent on a global recovery. The International Monetary Fund said earlier this month that the global economy will shrink 1.1 percent this year. It also raised its forecast for 2010, projecting growth of 3.1 percent.

“We’re closely looking at what’s going on outside Switzerland,” Gerber said. “There are still many clouds but the situation has improved in all major world regions.”

Falling Prices

The Swiss economy has been contracting since the third quarter of last year after companies cut spending and eliminated jobs to weather the global slowdown. The slump eased in the second quarter, when GDP fell 0.3 percent after a 0.9 percent drop in the previous three months.

Consumer prices have fallen on an annual basis for the past seven months. The SNB expects prices to drop around 0.5 percent this year before rising 0.6 percent in 2010 and 0.9 percent in 2011. That’s still less than half its 2 percent inflation limit.

The SNB in March started selling Swiss francs to weaken the currency and fight deflation. Switzerland’s status as a haven during times of turmoil buoyed the franc during the financial crisis even as its economy slumped.

“Before, there was a strong appreciation which wasn’t due to fundamentals of the economy. It was due to other factors, safe haven for instance,” Gerber said. “The central bank got the franc back where it was.”

The franc has fallen 2 percent against the euro since the SNB began the currency intervention on March 12. It had gained almost 8 percent in the previous six months.

Central banks around the world are already starting to ponder exit strategies as the global economy emerges from its worst slump in six decades. Hildebrand, currently the SNB’s vice president, said on Sept. 26 that the bank “will do whatever it takes on the exit side at the right time.”

Swiss borrowing costs are currently at 0.25 percent, which compares with the European Central Bank’s 1 percent key rate and the Bank of England’s 0.5 percent benchmark rate.

“Providing liquidity to markets is much easier than withdrawing liquidity,” said Gerber, who previously worked for the World Bank in Washington. “It will be a tough exercise. There’s a risk that central banks don’t choose the right moment.”

To contact the reporters of this story: Klaus Wille in Zurich at kwille@bloomberg.net; Simone Meier in Dublin at smeier@bloombert.net.