Swiss input prices fell at the fastest rate in more than two decades in May and a business association cut its growth forecast, underlining the national bank's dilemma in fighting the deepest recession in decades. The Swiss National Bank is expected to leave interest rates at current ultra-low levels when it meets on Thursday, and keep up purchases of corporate bonds and intervene if necessary to stem any rise in the Swiss franc.
"The Swiss economy is stuck in a deep recession. The strong downturn is creating considerable problems for the local export economy," economiesuisse, the country's largest business association, said in a statement. The combined producer and import price index tumbled 5.0 percent from a year ago, more than the 4.6 percent expected by economists, due to rapid falls in oil prices, the Federal Statistics Office said on Monday.
It was the sharpest fall since December 1986, when prices fell 5.3 percent. The index fell 0.3 percent from the previous month, highlighting the deflationary risks facing the SNB. "There's virtually no inflationary pressure at all, so basically they will keep the policy very expansionary," said Sarasin economist Jan Poser. "There's still more downside potential for inflation than upside." Switzerland slipped into recession in the middle of last year. The SNB expects the economy to shrink by up to 3 percent this year, which would be the worst decline in three decades.
SNB Vice-Chairman Philipp Hildebrand has said the bank's inflation forecast would determine when it was time to stop its expansionary monetary policy. The SNB aims to keep inflation below 2 percent, while also avoiding deflation. Consumer prices fell 1.0 percent on the year in May, the fastest rate in 50 years. Many economists predict inflation may stay negative for some time, leaving the risk of a deflationary spiral - a prolonged and widespread fall in prices.
SHRINKING: Economiesuisse now expects the Swiss economy to shrink 2.9 percent this year, a significant drop from its December forecast of zero economic growth in 2009, due to a rapid fall in exports. It expected gross domestic product to fall a further 0.8 percent next year and saw unemployment rising to 4.0 percent in 2009 and 5.3 percent next year.
The organisation expected negative inflation for 2009, given lower oil prices early in the year, and just above zero next year. "Economiesuisse believes that the Swiss export economy is slowly getting close to the bottom. But this development is not synonymous with an end to the recession," it said. "A reduction in overcapacity will be necessary above all in the auto parts industry, in parts of specialty chemicals, in textiles and also to some extent machinery."
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