OECD Economic Outlook, Volume 2023 Issue 2

Switzerland

Real GDP is projected to grow by 0.9% in 2024 and 1.4% in 2025. Tighter financial conditions, heightened uncertainty and weaker global trade growth will weigh on private investment and exports. Rises in rents and electricity prices will push inflation above 2% in 2024, before it returns to the Swiss National Bank’s target range of 0‑2% in 2025. These higher prices will moderate household consumption. Further weakness in foreign demand, energy supply disruptions and a sharp house price correction are key downside risks to activity.

Monetary policy should remain tight to ensure that inflationary pressures subside. Continued low fiscal surpluses are appropriate. Structural reform is needed to tackle population ageing and challenges due to the green and digital transitions. Increasing labour market participation, notably of mothers and older workers, would help alleviate labour shortages. Faster emission reductions and further electrification would improve environmental sustainability and increase energy security.

The economy has stagnated amid slower global growth

Economic growth has weakened in 2023. Past monetary tightening to fight inflation is cooling the economy, particularly investment spending. Manufacturing activity has stalled, with slow demand in trading partners weighing on exports. The KOF Economic Barometer, the Purchasing Manager Index (PMI) and the SNB’s business cycle indicator point to a loss of momentum in the economy. Household consumption has remained relatively strong despite very low consumer confidence, buttressed by a strong labour market. Headline inflation has retreated to the 0-2% target range since June 2023, after peaking at 3.5% in August 2022. This decline largely reflected lower import prices, with consumer price inflation of domestic goods and services remaining above 2%. Longer-term inflation expectations of companies and financial analysts have stayed within the 0-2% range.

Switzerland: Activity and inflation indicators

Source: Swiss National Bank; KOF Swiss Economic Institute; and Federal Statistical Office.

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Switzerland: Demand, output and prices

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Goods exports have slowed since the beginning of the year, as export market growth has moderated. The strength of the Swiss franc, supported also by foreign exchange interventions by the Swiss National Bank (SNB), has reduced export competitiveness, mitigated import price pressures and helped temper domestic inflation. Despite the strength of the currency, tourism inflows have continued and are now close to pre‑pandemic levels, supporting activity in accommodation and hospitality sectors.

Macroeconomic policy has been tight

The SNB’s key policy rate has been raised to 1.75% - a cumulative 250 basis points since June 2022. Interest rates are assumed to increase to 2% by the fourth quarter of 2023 and remain at that level until the beginning of 2025 to ensure that inflation returns durably within the 0-2% band. The general government is expected to register another surplus of 0.8% of GDP in 2023, despite weakening GDP growth. Fiscal prospects improved substantially during 2023, underpinned by extraordinary items. For example, the rescue mechanism for the electricity industry (0.5% of GDP) was not needed. In 2024, further spending is anticipated on Ukrainian refugees, as well as on infrastructure and renewable energy sources. General government debt is projected to decline to 36.4% of GDP by 2025.

GDP growth will remain modest

Real GDP growth is projected to remain below potential until the middle of 2024, reflecting the impact of tighter monetary policy on external and domestic demand. The economy is projected to grow by 0.9% in 2024 and 1.4% in 2025 as the economy recovers. Consumption growth is expected to be weaker in 2024 because of subdued household purchasing power. Rent increases, linked to the rising mortgage reference rate, and increases in electricity prices in the domestic retail market in the beginning of 2024, will push consumer prices higher. Headline inflation is projected to rise again above 2% during 2024, before moderating into 2025. Risks related to energy supply and prices remain for the upcoming winter. Uncertainty also remains around the persistence of core inflation and the impact of monetary policy tightening on growth. Tighter financial conditions could heighten the risks surrounding high indebtedness and the repricing of real estate, with potential repercussions on the financial sector.

Reforms are needed to accelerate the green transition and boost inclusiveness

Despite low public debt and a return to fiscal surpluses, pressures are growing in the medium term related to population ageing, the green transition and defence spending. Given the weakening of the economy, a slight fiscal easing is appropriate in the short term while medium-run challenges call for structural reform to counter rising costs and strengthened tax revenues. Switzerland must either cut spending, notably on pensions, or significantly raise public revenues over the coming years. Economic growth would benefit from higher labour market participation. Longer working lives and lower barriers for mothers to work full time would help in this regard. Stronger incentives and speedier approval processes can help accelerate emission reductions, notably in the transportation and building sectors, and facilitate further electrification of the economy, making growth more sustainable.