December 18, 2018 / 7:30 AM / 6 months ago

UPDATE 2-Swiss growth outlook sours after economy hits the brakes in Q3

* Swiss economic output contracted in Q3

* Growth seen resuming, but pace likely to wane

* Trade jitters, market turbulence and Brexit are concerns (Adds quotes, details)

By John Miller

BERLIN, Dec 18 (Reuters) - Switzerland slashed growth forecasts for 2018 and 2019 on Tuesday after its economy contracted in the third quarter, hurt by weak demand for new office equipment, a cooling construction industry and as a stronger Swiss franc dented exports.

For 2018, the State Secretariat for Economic Affairs (SECO) expects economic growth of 2.6 percent, short of the 2.9 percent level it forecast in September, after economic output in the third quarter fell 0.2 percent.

The Swiss government now also sees growth slowing to 1.5 percent in 2019, compared with previous expectations for 2.0 percent. In 2020, it expects growth to pick up to 1.7 percent.

Modest growth should return in the current quarter, SECO’s expert group predicted, but “the strong GDP growth rates of the first half of 2018 will no longer be achieved”.

Eric Scheidegger, head of SECO’s Economic Policy directorate, said several factors are conspiring against what had been, for Swiss standards, red-hot growth during 2018’s first half.

After robust construction activity over the last two or three years, the pace of new orders is slowing, while building permits are slightly declining across the Alpine Republic, Scheidegger said.

“Not only might we see fewer cranes over Swiss cities, but we likely won’t have the same level of growth in building trades” such as carpenters, painters, masons and flooring specialists,” Scheidegger said.

Meanwhile, investments in equipment and software, while still seen as growing into 2019 and 2020, will do so more slowly as Swiss companies gird themselves for cooling in Europe, Switzerland’s largest trading partner, and the United States, where the 2017-passed tax cuts’ effect will likely lose steam.

A survey this month showed Eurozone businesses expanded operations at the slowest pace in over four years, a development shared by Germany, Switzerland’s neighbour to the north.

French business activity plunged unexpectedly into contraction, retreating at the fastest pace in over four years amid anti-government protests, another survey showed.

Meanwhile, in the United States, fears of an impending recession have prompted some banks to pull back from the riskiest loans.

The safe-haven Swiss franc, partly in response, has strengthened 3.5 percent this year, making its exports less competitive.

“The world economy is weakening a bit,” Scheidegger said.

“Switzerland has been growing at a pace well above its average,” he added. “At 2 percent growth, the Swiss economy is doing well. Now, we’re moving back into a range” closer to more-normal levels of 1.5-1.7 percent growth, he said.

SECO’s forecast mirrored the Swiss National Bank’s view, when SNB President Thomas Jordan a week ago issued a more muted prognosis for 2019 amid fears of financial markets turbulence, trade tensions and worries the Brexit deal separating Britain from Europe could still fall through.

Switzerland’s employment market is seen stable, however, with 2.6 percent unemployment forecast for 2018, 2.4 percent for 2019 and 2.5 percent for 2020, SECO said. (Reporting by John Miller and Maria Sheahan; editing by Jason Neely and Ed Osmond)

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