The economy has slowed sharply after a buoyant 2018. This partly reflects the unwinding of the boost from international sporting events, as Switzerland hosts major international associations. Rising trade tensions and a slowing in Europe are also weighing on activity. Monetary policy has been very accommodative while fiscal policy has been neutral.

Investment has been weak, as have exports and imports (Figure 2). However, consumption is solid and unemployment is low. Shortages are growing in some sectors, such as technical fields. Real wages are still flat. With low cost pressures, consumer price inflation is positive but low.

Growth will strengthen in 2020 thanks to one-off factors (Table 1). Abstracting from international sporting events, growth will be close to trend. A recovery in wage growth and healthy labour market will support consumption. But risks to the outlook from global tensions remain prominent.

The policy rate has been negative – at -0.75% – since 2015 and the central bank’s foreign reserves remain high. Low interest rates are contributing to risks from housing market exposures and interest rate-related risks in the financial sector are high.

Making greater use of fiscal space would help monetary policy to normalise. Fiscal surpluses exceeded 1% of GDP in 2017-18. There is space to increase spending within the debt-brake rule. Revenue has been stronger than budgeted and expenditure has been persistently below the ceiling. The debt-brake rule should treat spending overruns and savings symmetrically. When inflation is firmly on an upward trend, monetary policy should begin to tighten, taking into account risks of exchange rate appreciation.

Tighter macroprudential regulation would curtail financial stability risks. Stronger lending standards for investor mortgages, which have become riskier than owner-occupier loans, will be introduced in 2020. Action should be reinforced by creating a formal framework for lending standards enforced on a comply-or-explain basis.

Switzerland’s financial sector is also exposed to climate-related risks. Information about exposures would help investors to make more informed decisions. The sector’s financing decisions can contribute to climate change mitigation. Improving climate-related disclosure for banks, pension funds and insurers could increase investment in sustainable assets and reduce risks associated with carbon-intensive asset exposures.

Policies have not kept up with rising life expectancy. In particular, the statutory retirement age has remained at 65 years for men since its introduction in 1948 despite Swiss life expectancy at 65 having gained eight years. Women’s retirement age is 64. Current settings imply that a relatively long time will be spent in retirement (Figure 3).

The pension system currently provides adequate incomes in retirement. For most employees the system offers high replacement rates, including through extra-mandatory schemes. However, replacement rates from the mandatory pension system will fall in coming decades. This risks increasing income inequality or adding to fiscal pressure through other social assistance. In the second pillar the rate at which accumulated assets in the mandatory part of the system are converted to a pension is set by law. The rate is too high, lowering the benefits available for younger generations.

Public spending on old-age pensions and health care will increase as the population ages. The burden is smaller than for many OECD countries but will largely fall on cantons and municipalities. Despite recent reforms the public first pillar scheme still faces sustainability challenges. Given fiscal rules, rising ageing-related costs threaten to crowd out other public spending.

Raising the statutory retirement age would mitigate the economic cost of ageing. It would increase individuals’ retirement savings, reduce public pension financing needs, add to government revenues and raise economic growth. Women’s retirement age should be raised to men’s. The age should then be gradually lifted to 67 and linked to life expectancy thereafter.

Barriers to working longer should be addressed. Employment rates of older workers up to 65 years are comparatively high. Still, seniority wages together with higher rates of social security contributions act as disincentives to hiring and retaining them. The annual conference on old-age workers, which gathers social partners and other stakeholders, should be used to find ways of introducing greater flexibility into the wage-setting system. This could include training opportunities. Additional pension benefits from working beyond age 65 are being considered and welcome.

Shifting the tax mix towards more growth-friendly sources would help prepare the system for ageing. Plans to raise the VAT rate and lower personal income taxes for second-earners go in the right direction. Greater use of VAT, recurrent tax on immovable property and environmentally related taxes can help fund cuts in personal income tax for low-income earners.

Containing health care costs is rightly a government priority. Average health spending per person is the second-highest in the OECD. Planned reforms will tackle hospital costs, specialist fees and pharmaceuticals prices. The roll-out of electronic patient dossiers has the potential to enhance co-ordination, efficiency and outcomes. Incentives should be offered to practitioners to secure greater participation and reap the full benefits of the reform.

Long-term care needs increase with old age. Over one-fifth of those aged 65 or more received long-term care in 2017. But the system is fragmented and out-of-pocket expenses for home-based care can be unaffordable even with moderate needs. This creates incentives to move to a nursing home even with low care needs, which is neither cost-effective nor welfare-improving.

With its well educated workforce, excellent infrastructure, and high levels of R&D, Switzerland is well placed to benefit from new technologies. Digital technologies, for instance, can boost productivity. Take-up is around the OECD average, with many firms slower to adopt digital technologies than in leading countries.

Skills shortages in IT-related fields are hampering expansion of firms and the absorption of new technologies. IT competencies have not kept pace with leaders (Figure 4). Easing procedures for immigration from outside of Europe would assuage skill shortages. Promoting scientific and technical courses, particularly among women, would add to supply in the medium term.

Promoting a more dynamic business environment can spur adoption of digital technologies. Barriers to entry, including obstacles to inter-cantonal trade, dampen competitive pressures. Government involvement in sectors such as telecommunications is significant and sector regulators have weaker powers than elsewhere. Restrictions on services trade remain substantial. Stronger privacy protection and encouraging better management of digital security risks can help cultivate trust.

Re-skilling and upgrading skills is vital to ensuring that workers are not left behind in the digital transformation. This will also improve retirement incomes. Lifelong learning is well-established in Switzerland but less-educated workers and those outside the labour force are less likely to participate. Recent measures to promote training are welcome. Targeted assistance to vulnerable workers, through vouchers for example, could further raise take-up. Spending on targeted training programmes should be ramped up. Conversely, planned measures to provide cash benefits to jobseekers aged over 60 risk lowering employment rates of older workers.

Expanding digital government can increase productivity and enhance services. The planned introduction of an electronic identification will overcome a major barrier to e-government. Policy-making is also hampered by data availability. Implementing the OECD Going Digital roadmap for measuring the digital transformation, with a priority on more timely and internationally comparable data, would provide a strong foundation for policy.

New technologies such as electric vehicles and ride-sharing platforms can lower Switzerland’s carbon emissions. Cars purchased in 2018 emit 14% more CO₂ than the EU average. The government aims to raise the share of electric vehicles in new purchases to 15% by 2022, from 3% in 2018. Linking the tax rate on vehicle purchases to emissions would strengthen price incentives to purchase low-emission vehicles. This structure could help more cantons link their annual taxes to cleaner cars. Mandating the provision of charging stations in new buildings would support the roll-out.