Energy crisis hits the economy

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Economy

Energy crisis: Switzerland could scrape a recession

The federal government revised its economic forecasts downwards again. Nevertheless, the Swiss economy should be spared a recession – provided energy is not rationed.

Quality instead of quantity: The Swiss economy is relatively robust due to its low energy consumption. (icon picture)

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The State Secretariat for Economic Affairs (Seco) expects the economy to weaken significantly. The federal government’s expert group for economic forecasts lowers its growth forecast to 2 percent for 2022 and 1.1 percent for the coming year. In June, the experts were still assuming growth of 2.6 and 1.9 percent respectively. There would be no recession, said Seco Deputy Director Eric Scheidegger at a media conference on Tuesday.

However, this is only the most likely of three scenarios that Seco has worked out. The second most likely scenario predicts a recession of -0.8 percent for the coming year and an associated increase in the unemployment rate to 2.6 percent.

According to Scheidegger, this scenario can be expected if inflation cannot be slowed down and the central banks are forced to adopt an increasingly restrictive monetary policy. High price pressure with a simultaneous decline in economic output would then be expected. This negative scenario would also have to be expected if gas or electricity were rationed with production losses across the board. A third scenario would be more positive, but according to Scheidegger it is “the least likely.”

Switzerland is significantly less affected than the EU and the USA

Switzerland is particularly affected by the crisis through its effects on important trading partners in Europe, North America and Asia. These are much more affected by inflation than Switzerland, said Scheidegger. In the USA in particular, there are signs of widespread inflation that cannot be directly attributed to the energy crisis. This makes further restrictions on the US central bank’s monetary policy likely.

In the euro area and thus in Switzerland, on the other hand, increased energy, housing and food costs are mainly responsible for the rise in prices, according to Scheidegger. However, energy prices have had a much stronger impact on the economy abroad than in Switzerland. He sees the reason for this in Switzerland’s economic structure: “By specializing in high added value, we no longer have a basic industry that consumes a lot of energy.”

Recession would have little impact on the labor market

The expert group estimates inflation in Switzerland at 3 percent for 2022 and 2.3 percent for the coming year. According to the Seco statement, domestic demand will be dampened accordingly. However, the labor market is likely to remain stable – even with the recession of -0.8 percent forecast in the negative scenario. In the base scenario, Seco expects an unemployment rate of 2.2 percent for 2022 and 2.3 percent for 2023. In the negative scenario, the unemployment rate would be 2.2 percent in 2022 and 2.6 percent in 2023.

However, both scenarios assume that the western central banks will bring inflation under control in the medium term and that the energy crisis will stabilize over the next summer. Both a flattening of growth and a recession would therefore only be a temporary dip – in the second half of 2023 the economy would be back on the growth path in both scenarios.

Already the fourth downward correction

With its current assessment, the Seco group of experts has revised its expectations downwards for the fourth time in a row. In June, the same experts had still expected economic growth of 2.6 percent for 2022 and 1.9 percent for the coming year. In March, the group of experts lowered its forecast for 2022 from 3 percent growth to 2.8 percent after the outbreak of hostilities in Ukraine.

In December 2021, Seco had already lowered its forecast for 2022 to three percent growth – it had previously assumed record growth of 3.4 percent. In addition to the great uncertainty at the time about the further course of the pandemic, Seco cited capacity bottlenecks and rising energy prices as the reason for the first weakening of expectations. At that time, however, inflation was still seen as a temporary phenomenon. Inflation for the current year was estimated at 1.1 percent on an annual average.

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