The Swiss government raised its 2012 growth forecast on Tuesday, saying robust domestic demand was helping to offset the ill effects of the strong franc on exports, though a worsening of the euro zone crisis had the potential to hamper momentum.
Switzerland's State Secretariat for Economics (SECO) now sees growth of 1.4 percent for 2012, up from a March forecast of 0.8 percent. It sees inflation at -0.4 percent this year, unchanged from its earlier forecast.
"The positive growth forecasts for the Swiss economy are significantly dependent upon the assumption that European economic policy is successful in preventing an uncontrolled proliferation of the crisis into a widespread banking and financial crisis", it said.
The Swiss National Bank – which holds its quarterly monetary policy meeting on Thursday – is also expected to lift its growth forecast from "nearly 1 percent" as the cap it imposed on the safe-haven franc last September helps shield the economy.
Switzerland earns every second franc abroad, and the strong value of the currency is hampering trade and eroding exporter's margins. Nevertheless, thanks in part to strong consumption at home, national output expanded a more than expected 2 percent in the first three months of this year.
Tuesday's upward revision was due chiefly to good performance of the economy in late 2011 and early 2012, the SECO said, and did not signal a more optimistic assessment of the economy's prospects.
A severe recession in the euro zone would have a knock-on effect for Switzerland, the SECO also said.
SNB EYED
The Swiss government's revision for this year comes after other economists – including those surveyed by the KOF economic institute – also lifted their forecasts for growth in 2012.
According to a Reuters poll of economists, the SNB is likely to revise its growth view for 2012 to 1.3 percent. It is also expected to reaffirm its commitment to the cap on the franc of 1.20 per euro it imposed to ward off recession.
The economy's strong showing so far this year – which the SECO said was due in part to the cap giving firms more security – also makes the SNB's limit potentially harder to defend as it undermines the central bank's justification for the policy.
And with a question mark hanging over Greece's future in the euro – Athens holds national polls at the weekend that may determine its future in the currency bloc – the SNB has had to intervene heavily of late to defend its line in the sand.
The International Monetary Fund has said the cap on the strong franc is appropriate while growth and deflation risks remain, but that the SNB should allow the currency to float freely again when the economy stabilises.
With the euro zone crisis showing no signs of abating, the central bank has also repeatedly warned it will take further measures if the economic outlook sours.
Even though many economists and some leading indicators have become more upbeat on the prospects for the economy, not all data is painting a rosy picture: Data showed manufacturing activity fell to a three-year low in May
The euro zone is Switzerland's biggest destination for exports, and the SECO said the sector would not emerge from the crisis unscathed.
"The latest deterioration in Europe poses a serious risk to the further development," it said.
The SECO adjusted its GDP forecast for 2013 down slightly, to 1.5 percent from 1.8 percent. It raised its 2013 inflation view a notch, however, to 0.5 percent from 0.4 percent.
The SECO's forecasts were based on GDP in the euro zone contracting 0.4 percent this year and growing only 0.7 percent in 2013.
