OECD Economic Outlook, Volume 2023 Issue 1

Switzerland

The economy is projected to grow by 0.6% in 2023 and 1.2% in 2024. Tighter financial conditions, subdued economic sentiment and heightened inflation will moderate household consumption and private investment. Geopolitical tensions and elevated uncertainty will reduce trade. Headline inflation will remain above the Swiss National Bank’s target range of 0-2% in 2023, before moderating towards the end of that year. Financial market stress, house price corrections and a further weakening of foreign demand are key downside risks to activity.

Monetary policy will need to be tightened further to ensure that inflation returns to the target range, and risks to financial stability will need to be closely monitored. Continued fiscal surpluses are appropriate, but targeted measures to assist the most vulnerable households should be maintained. Structural policies are needed to increase labour market integration among under-represented groups, and to raise energy efficiency to help ensure energy security and improve environmental sustainability.

Economic activity is weak and inflation elevated

Indicators point to positive yet subdued growth dynamics in recent months. Consumer confidence remains weak, on the back of heightened inflation and tighter financial conditions. Russia’s war of aggression against Ukraine is weighing on global demand, thus lowering exports and investment. However, the labour market is tight with a low unemployment rate. Headline inflation was 2.6% in April 2023, above the 0-2% target range of the Swiss National Bank (SNB). Medium‑term inflation expectations of firms and analysts remain below 2%, within the target range.

Switzerland: Activity and inflation indicators

1. GDP adjusted for the effects of major international sporting events. Such events can have a sizable impact on Swiss GDP, as international sporting organisations based in Switzerland receive revenues from television and branding rights. As the events do not occur every year, their impact on Swiss GDP complicates business cycle analysis.

Source: State Secretariat for Economic Affairs (SECO); and OECD Consumer Prices database.

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Switzerland: Demand, output and prices

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Stress in global financial markets in March culminated in the takeover of Credit Suisse by UBS – combining Switzerland’s two globally systemically important banks. Sizeable deposit outflows and loss of confidence in Credit Suisse, following years of financial losses and poor risk management practices, led to the state-facilitated transaction. The Swiss authorities provided emergency liquidity lines and guarantees to support the takeover, staving off near-term financial stability concerns. The projections assume that financial sector stress remains contained over the remainder of 2023 and 2024. Gas supplies for next winter remain a concern as about one-half of natural gas consumed was imported from Russia before the war. Recommendations of the authorities to limit the use of natural gas have been heeded. In the winter months of October 2022 to March 2023, gas consumption was reduced by more than 15% compared to the average of the last five years, while the use of electricity only fell by 4%. The projections assume no major energy supply disruptions over the 2023-24 winter.

Further rate increases are needed to bring inflation back within the target range

The SNB has significantly tightened monetary policy since last year. The 0.5 percentage point increase in March 2023 brought the main policy rate to 1.5% and the SNB has continued to intervene in the foreign exchange rate market to ensure appropriate monetary conditions. As core inflationary pressures persist and global interest rates are rising, the key policy rate is assumed to increase to 2.25% by the third quarter of 2023 and remain at that level throughout the projection period. The general government registered a larger-than-expected surplus in 2022, which is expected to moderate to 0.1% of GDP in 2023 due to the absence of profit transfers from the SNB and outlays on national security and refugees. The Federal Council has taken steps to limit expenditures from 2024 onwards and a 0.3% of GDP surplus is projected for 2024.

GDP growth will slow amid tightened financial conditions

Real GDP growth is projected to remain below potential until the second quarter of 2024, reflecting the impact of tighter monetary policy on domestic demand and slow global demand growth. Rising services prices alongside high energy costs will keep headline inflation above the central bank’s 0-2% target range until the end of 2023. Uncertainty surrounding the outlook is high. Substantial financial sector stress or a price correction in the real estate market could threaten financial stability. Severe energy supply disruptions could adversely affect industrial production, while also increasing price pressures. On the other hand, a rapid and durable end to the war in Ukraine would support global growth, restore consumer confidence and lower energy prices.

Increasing inclusiveness and accelerating the green transition can raise growth

The countercyclical capital buffer on residential properties is at the maximum level of 2.5% (according to Basel III) and house prices are still rising. Close monitoring of financial risks related to rising interest rates and the real estate market is warranted. Undertaking fiscal consolidation is appropriate to maintain ample fiscal buffers, but support to the vulnerable, including refugees, should be maintained. Increasing the supply of affordable childcare and lowering work disincentives for second earners would help support the labour market integration of mothers with children. Simplifying and speeding-up the process for recognition of foreign qualifications and increased access to training programmes can boost skills and raise labour market participation among groups that are underrepresented in the labour market. Further investment in renewable energy would reduce reliance on the gas and oil markets and enhance energy security.