Switzerland enters recession after COVID-19 causes biggest ever GDP drop

* Swiss economic output falls 8.2% in Q3, enters recession

* Government says recovery now underway

* Says economy may return to pre-crisis level by end of 2021

* Innovation seen as key driver for recovery

ZURICH, Aug 27 (Reuters) - Switzerland’s economy shrank by 8.2% in the second quarter compared with the first three months of the year, the government said on Thursday, as the COVID-19 pandemic triggered the worst quarterly downturn in 40 years.

Following a revised 2.5% drop in the first quarter, it was the steepest decline since quarterly records began in 1980, the State Secretariat for Economic Affairs (SECO) said.

“Domestic economic activity was severely restricted in the wake of the pandemic and the measures taken to contain it,” SECO said.

The downturn was worsened by the global recession, an added woe for export-reliant Switzerland, although the country fared better on an international comparison, SECO said.

The strong pharmaceutical sector also increased its sales, preventing a steeper slump in manufacturing, where watchmakers and machinery makers all struggled.

The service sector was also battered, with accommodation and food services seeing a 54.2% drop in economic output as hotels and restaurants closed and tourists stayed away.

Following the drop in the first quarter, Switzerland has now entered a technical recession, defined as two consecutive quarters of contraction.

Switzerland had slipped into a recession at the end of 2018 but that downturn was much shallower with quarterly drops in GDP of 0.3% and 0.1%.

Key markets for the Swiss have also been hit hard.

The German economy contracted a record 9.7% in the second quarter as consumer spending, company investment and exports all collapsed.

The French economy contracted a post-war record 13.8%, while Britain’s economy shrank a record 20.4%.

SECO economist Ronald Indergand said Switzerland managed to avoid further damage by lifting its lockdown restrictions earlier than other countries.

“It’s bad, but not as bad as we first feared,” he said, adding a recovery was now underway. He said he expects full-year GDP to decline less than the 6.2% the government forecast in June.

“The full recovery is going to take a year or two. By end of 2021 we may reach pre-crisis levels.”

Innovation and research development will be crucial to helping Switzerland grow in the medium and longer term, Indergand said.

“Innovation is always one of the key factors for the Swiss economy ... especially in industries most heavily by the crisis like tourism or manufacturing,” he added. (Reporting by John Revill; Editing by Hugh Lawson)