OECD Economic Outlook, Volume 2020 Issue 1

Switzerland

The COVID-19 pandemic has triggered a large decline in output. Despite a shorter shutdown than in many countries, private consumption and investment have slumped. GDP is expected to fall by 10% in 2020 if there is another virus outbreak later in the year and by 7.7% if the pandemic outbreak subsides by the summer. In the double-hit scenario, domestic demand will rebound only slowly due to low confidence. Private consumption will also be affected by higher unemployment. In the single-hit scenario, domestic demand should rebound more rapidly. In both scenarios, exports will recover only slowly, as foreign demand will remain weak, while unemployment will increase as the use of short‑time work schemes declines.

Monetary policy has remained accommodative, with negative interest rates. Low public debt leaves fiscal space to further support firms, especially SMEs, if the recovery is slower than expected. Training will be necessary for the low‑skilled unemployed. The development of digital tools is needed to enhance e‑services and especially e‑medicine, as well as raise productivity. More support will be needed to expand the use of digital technology and encourage continuing education and training for groups who are most at risk from the effects of digitalisation.

Extensive containment measures have been implemented

The first case of COVID‑19 was recorded on 25 February and the virus spread quickly thereafter. While cases spread to all cantons, Geneva, Ticino, Vaud, Basel‑City and Valais have been the most affected. The authorities have managed to contain the growing pressure on the health system. To identify supply bottlenecks early and remedy them in a targeted manner, the federal government coordinated a response with cantons, including by introducing an obligation to report inventories of essential medicines and medical goods such as ventilators, diagnostic tests, surgical masks and protective suits.

Switzerland: Economic activity and two scenarios of real GDP

Source: OECD Economic Outlook 107 database; State Secretariat for Economic Affairs; and KOF institute.

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Switzerland: Demand, output and prices (double-hit scenario)

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Due to the spread of the COVID-19 virus, the situation was categorised as "extraordinary", according to the Law on Epidemics, enabling the federal government to take over certain responsibilities from the 26 cantons and imposing containment measures. From mid-March, all schools were closed and all citizens were encouraged to stay home, especially the sick and the elderly. The government declared a ban on all private and public events and closed bars, restaurants, sports and cultural spaces. Border controls with neighbouring countries were reintroduced. Only Swiss citizens, people with a residence permit in Switzerland and those who travel to Switzerland for professional reasons – cross-border workers – were allowed to enter the country. Some restrictions have been eased after April 26 and some schools reopened after 10 May.

The economy has been hit severely

Many economic sectors have been severely impacted by the shutdown, especially tourism, hotels and restaurants, retail sales and cultural activities. By contrast, the pharmaceutical industry, which represents 30% of manufacturing value‑added, has been resilient. In spite of the implementation of short‑time work schemes, the number of unemployed persons increased significantly. The KOF economic barometer reached its lowest level since early 2009. Consumer confidence has plummeted, which will slow the rebound of private consumption and investment. The Swiss effective exchange rate continued to appreciate during the shutdown.

Switzerland: Demand, output and prices (single-hit scenario)

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Measures to support the economy are extensive

A large package of CHF 72 billion (10.2% of GDP) has been introduced to help companies survive during the downturn and support employment. Part of the help includes government guarantees for loans (up to 100%) of companies in difficulty. Companies can extend payment deadlines of VAT, customs duties and special excise taxes without any interest. Companies and the self-employed may be granted a temporary interest‑free delay for payment of social insurance contributions. Furthermore, the Corona Income‑Compensation Scheme has been implemented to compensate the loss of income for employees and self-employed workers who are unable to work. To cushion employment impacts, Switzerland’s existing short‑time scheme (part‑time unemployment benefit) has been expanded, administrative procedures have been eased and companies' co-payments have been temporarily suspended. The duration of unemployment compensation was extended during the crisis. Also, the Swiss National Bank (SNB) has introduced a COVID-19 refinancing facility to support banks’ ability to provide loans granted under the government’s COVID-19 scheme. Moreover, the SNB announced it would provide liquidity as part of the extended swap arrangements with other central banks.

The recovery will be slow

In the event of another virus outbreak later in the year, the economic impact will be more severe, with more bankruptcies, a stronger increase in unemployment and lower investment. GDP will rebound in 2021, rising by 2.3%, driven by consumption. In the single‑hit scenario the rebound will be quicker, with GDP growth of 5.7% in 2021 while short‑time work schemes cushion the impact on unemployment. In both scenarios, the weak recovery in main trading partners and a strong currency will hold back exports. Risks are on the downside. Further appreciation of the currency would damp the expected trade recovery further. Prolonged uncertainty will cause business investment to recover only slowly. An increase in corporate and household debts, together with very low interest rates would increase the risks in the financial sector. On the other hand, a stronger return to growth in Europe would be positive for exports. Moreover, the economy could benefit from a good performance of the pharmaceutical sector.

More temporary fiscal support may be needed

Not much room exists for a further easing of monetary policy that has been very accommodative for several years. Despite significant government spending to address the crisis, low public debt leaves room for further fiscal policy easing to continue to support firms, such as small and medium-sized firms and start‑ups in particular, if the recovery is slower than expected. More financial resources and training may also be needed to address increases in unemployment. The government should be prepared to implement additional measures to relaunch the economy and boost confidence about future prospects. The recovery would be helped by the take‑up of digital technologies especially in small and medium‑sized firms. This will require expanding training for jobseekers and using subsidies to encourage continuing education and training for groups who are most at risk from the effects of digitalisation.