In H2 2024, Swiss growth is expected to ease slightly (0.3% q/q in Q3 and 0.2% q/q in Q4 according to our forecasts). The persistent weakness of the country's main trading partners will continue to weigh on its growth, but the lagged impacts of the monetary easing initiated by the SNB in March 2024 should play out more favourably. We expect the SNB to make two further policy rate cuts by the end of the year, due in particular to the favourable developments seen in inflation in recent months.
While euro area inflation peaked at 10.6% y/y in October 2022, Swiss inflation has never exceeded 3.3% y/y, in July-August 2022. This favourable gap can be explained by the country's structural characteristics, particularly its energy mix, but also by the strength of its currency.
Switzerland differs from other European countries in that it has significantly lower inflationary pressures, protected as it is by its strong currency and by resilient business activity which should continue to grow for the rest of 2022 and during 2023. Although the Swiss National Bank (SNB) is likely to argue that 3.5% inflation year-on-year in August is a reason to raise its key rate by 75 bps on 22 September, and so exit from its policy of negative interest rates, it is unlikely that this monetary tightening will last over the longer term, as inflation is already showing signs of slowing down.
The very accommodative policies implemented by the Federal Council and the Swiss National Bank have been very successful in limiting the economic consequences of the pandemic. In 2020, economic activity contracted by 3%. The latest business cycle indicators point to a strong rebound in the second half of the year. The recovery is broad-based. Private consumption will be one of the main engines of growth, as households will spend part of the savings accumulated during the crisis. The breakdown of the negotiations between the Swiss Confederation and the EU, and the possible introduction of a global minimum corporation tax rate are likely to undermine the country’s competitiveness in the medium term.
After the deepest recession in recent history, economic activity is turning up again due to the gradual easing of the lockdown measures in Switzerland and the neighbouring countries. The exceptionally accommodative monetary and fiscal policy stances are also contributing to the recovery. SMEs have made use of the special loan programme and employees have benefitted from the short-time work scheme. Nevertheless, the recovery is likely to be slow, and economic activity is unlikely to return to pre-crisis levels before end 2022. The government is confident that the Covid-related debt can be repaid without raising taxes.
Switzerland is a federal republic consisting of 26 highly independent regions (cantons) and three official languages German, French and Italian.This mode of government has served the country well. It is one of the most prosperous in the world, with GDP per capita in terms of purchasing power 70% higher than the EU average. Although not a member of the European Union, the Swiss Confederation has adopted various provisions of European Union law and pays into the European budget in order to participate in the Union’s single market. The country is a member of the European Free Trade Association (EFTA), but has not ratified the Agreement on a European Economic Area with the EU. In 2020, Switzerland pulled out of negotiations with the EU on an Institutional Framework Agreement, which would have enhanced bilateral relations. This could complicate cooperation with the EU, in particular in new areas.
The majority of Swiss workers are employed in the service sector, mostly in business and finance and tourism. Chemical and pharmaceutical production and mechanical engineering/metals are the main branches of the industrial sector. Thanks to business-friendly legislation, low tax rates, and tax deductions for R&D, Switzerland has become a preferred destination for R&D activities. The importance of agriculture for the economy is in diminishing.
