OECD Economic Outlook, Volume 2024 Issue 1

Switzerland

Growth is projected to be 1.1% in 2024 and pick up to 1.4% in 2025. Weaker global trade and tight monetary conditions will weigh on private investment and exports. Inflation will increase temporarily towards the end of 2024, pushed by rent and electricity price increases, yet remain within the Swiss National Bank’s price stability range of 0‑2%. Further weakening of foreign demand, supply disruptions or a sharp house price correction are key downside risks to activity.

Monetary policy should stay tight to ensure that inflation remains durably within the target range. A broadly neutral fiscal stance is appropriate. Structural reform is needed to tackle population ageing and challenges related to the green transition. Labour shortages can be alleviated by increasing labour market participation, notably of mothers and older workers, and through immigration. Faster emission reductions and further electrification would improve environmental sustainability and increase energy security.

Real GDP growth remains moderate

Economic activity was subdued in the beginning of 2024. Weak foreign demand, an erosion of domestic purchasing power due to inflation and tightened financial conditions weighed on growth. The Purchasing Manager Index in manufacturing and the KOF Economic Barometer point to modest momentum in the economy. Consumer confidence remains low, damping retail trade. Capacity utilisation has fallen, and manufacturing production stalled. Sluggish demand in trading partners hampers growth in exports, and muted prospects lower business investment. The labour market has been robust, notwithstanding some recent weakening. Headline inflation has been within the 0-2% target since June 2023, and longer-term inflation expectations remain within target. Yet, private services price inflation remains above 2%.

Switzerland: Activity and inflation indicators

Source: KOF Swiss Economic Institute; Swiss Association for Material Management and Purchasing; and Federal Statistical Office.

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Switzerland: Demand, output and prices

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Goods export volumes have been muted. The strength of the Swiss franc has lowered import prices and helped temper domestic inflation. Despite the strength of the currency, tourism inflows have continued and are now very close to pre-pandemic levels, supporting activity in the accommodation and hospitality sectors.

Monetary policy should remain tight

The SNB’s key policy rate was lowered to 1.5% in March from 1.75%. Nevertheless, the interest rate is still 225 basis points higher than in June 2022. The policy rate is assumed to stay at this level until the second half of 2024. As prospects for inflation improve, interest rates are poised to be cut by a cumulative 75 basis points to 0.75% by the end of 2025. The general government registered another surplus in 2023, at 0.5% of GDP, despite weakening GDP growth, while the federal government ran a structural deficit for the second year in a row. To comply with the debt-brake rule, federal contributions for supplementary childcare, railway infrastructure and social security will be reduced. A broadly neutral fiscal stance is warranted, while automatic stabilisers should continue to operate freely to mitigate the effect of lower growth. General government debt is projected to decline slightly to 36.8% of GDP by 2025.

GDP will grow modestly

Real GDP growth is projected to remain below potential in 2024, reflecting the impact of tighter monetary policy on global and domestic demand. The economy is projected to grow by 1.1% in 2024 and 1.4% in 2025. Past rent increases and higher electricity prices in the domestic retail market will push up headline inflation temporarily in the second half of 2024, before moderating again in early 2025. The unemployment rate will increase slightly. Uncertainty surrounding the outlook is high. Risks in relation to international supply disruptions remain and could raise prices and dampen activity, thereby slowing the economy. High household indebtedness and the possibility of repricing of real estate also pose risks to the financial sector. On the other hand, favourable resolution of geopolitical tensions would result in higher trade, revived confidence and higher growth.

Structural reforms are needed to sustain living standards

The green transition, defence needs and population ageing raise fiscal pressures. Reforms that ensure the effective retirement age increases in line with life expectancy are needed to counter rising costs. Systematic spending reviews can also provide fiscal savings. Increasing and broadening value-added taxes and raising taxes on immovable property would strengthen tax revenues. Economic growth would be boosted by higher labour market participation. Longer working lives, immigration and lower barriers for mothers to work full time would help in this regard. Stronger incentives and speedier approval processes for renewables can help accelerate emission reductions, notably in the transportation and building sectors, and facilitate further electrification of the economy, making growth more sustainable.