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Switzerland is in its second recession in as many years. But the world's leading economic body has praised the country's policies for combatting the downturn and some sectors of the economy are showing strong resilience.

The Alpine state's economy appeared to stall in the second quarter of the year after contracting in the first, according to Swiss National Bank (SNB) president Jean-Pierre Roth.

The central bank has slashed interest rates seven times since March 2001, to 0.25 per cent, to halt the Swiss franc's gains on international currency markets and boost the nation's economy.

To stress its commitment to maintaining currency stability, the bank has announced it will buy foreign currencies if necessary.

The Swiss franc rose 6 per cent against the US dollar in the first five months of the year. This damaged trade with the United States, which usually accounts for a 10th of Swiss exports.

The country's reputation as a safe haven meant investors turned to the Swiss franc during the Iraqi crisis, pushing up the currency's value.

Worse, Switzerland's biggest market, Germany, which takes a fifth of its exports, is in recession and may enter a period of deflation. This has squeezed Swiss trade, contributing to the country's overall economic slowdown.

A government spokesman says Germany's recession adds to the risks the Swiss economy faces. However, he expects Switzerland to recover by the beginning of next year.

Analysts are increasingly gloomy about Switzerland's prospects as international trade has not recovered at the pace of expectations.

Banking giant Credit Suisse forecasts zero growth in Switzerland's economy this year and 1 per cent growth next year.

The Swiss bank counts dampened consumer confidence, a loss of export momentum and a slight decrease in industrial growth among Switzerland's woes.

Credit Suisse believes companies will shed workers as a result of this economic squeeze, pushing up unemployment to 4 per cent this year from 2.8 per cent last year.

The International Monetary Fund has expressed concern about the depressive effects on confidence of sluggish growth in the European Union and the Middle East conflict.

However, the world's economic watchdog has praised the effectiveness of Swiss policies to overcome these problems.

The IMF supports the Swiss government's flexible monetary policies, introduced to combat falling demand worldwide for goods and services.

'A clear focus on medium-term price stability, and an impressive track record of delivering in this regard, has enabled the Swiss National Bank to respond promptly to the evolving economic situation and to upward pressure on the Swiss franc; short-term interest rates have appropriately been reduced to almost zero,' states an IMF report published earlier this year.

Swiss inflation was cut to 0.6 per cent last year and will rise to only 0.9 per cent this year, according to Credit Suisse.

The IMF says it is satisfied with the government's handling of Switzerland's budget deficit.

'The general government deficit was small in 2002. It is likely to widen in 2003, but this will broadly reflect the operation of the automatic stabilisers,' the report says.

The IMF warns of consolidation in Switzerland's sizeable financial services sector as the global downturn persists. However, it says new government rules and other reforms will strengthen the sector in the longer term.

'After having accounted for about half of the growth in the entire economy in the past decade, the sector is bearing the brunt of sharp declines in financial markets,' the report says.

'Banks are making considerable adjustments and white-collar unemployment has been a novel feature of this downturn.

'For the large international banks and banks that rely heavily on fee income related to the performance of financial markets, global competition will likely intensify, placing a premium on prudent risk management, good reputation and cost containment.'

The IMF welcomes initiatives to integrate banking and insurance supervision, increased resources for regulatory authorities, efforts to improve the supervision of bank auditors and new anti-money laundering ordinances as measures that will safeguard the reputation of Switzerland's financial sector.

Amid the gloom which has gathered over the financial and other sectors of the Swiss economy, there are industries that continue to impress.

Swiss watchmaking is in good form, according to Credit Suisse. This is partly because the luxury market is less affected by cyclical change. 'Swiss brands in the luxury segment are enjoying a favourable competitive position,' the bank reports.

Graphic: SWKEYgsp



Ray of economic sunshine glimpsed through gloom