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.
Very accommodative macroeconomic policies
GROWTH AND INFLATION (%)To ease the impact of the pandemic on the economy, the Federal Council (FC) had spent CHF 15 bn (2% of GDP) in 2020, mainly on the short-time working scheme (CHF 10.8 bn) and loss of earnings compensation (CHF 2.8 bn). In addition, in collaboration with the Swiss National Bank (SNB), a loan guarantee programme was put in place. As tax receipts declined due to the contraction in output, the 2020 government budget showed a deficit of 2.6% of GDP, after having showed surpluses in excess of 1% of GDP since 2017. The debt-GDP ratio increased to 40% of GDP.
Fiscal policy is set to remain very accommodative in 2021. In its 2021 budget, the FC has reserved CHF 24.4 bn for expenses related to the pandemic. The budget envelope is very large on purpose to make it possible to react quickly if necessary. It is likely that the ultimate budget deficit in 2021 will only increase to 3.5% of GDP.
The monetary stance will remain very accommodative. The SNB is expected to keep its policy rate at -0.75%, and might intervene in the foreign exchange market to counteract strong upward pressure on the CHF. The easy monetary stance has led to strong price rises in real estate markets.
Strong rebound but risks on the horizon
These policies were very effective, as GDP contracted by 2.7% in 2020, which compares favourably with the neighbouring countries. From September 2020 onwards the country was confronted with a second wave of Covid-19 infections, which forced the FC to re-impose lockdown restrictions. The economy contracted by 0.5% in Q1, after a meagre 0.1% growth in the preceding quarter. However, the decline was much less than in Q2 2020, as growing activity in the manufacturing sector partly offset the sharp decline in services.
From March onwards, business activity picked up again as the authorities gradually removed the restrictions. In May, the KOF economic barometer once again reached a historic high, signalling a strong recovery from the middle of 2021, provided that the containment of the virus continues to progress. The recovery is broad-based as the manufacturing sector is profiting from growing external demand, whereas services are benefitting from the removal of the lockdown restrictions. Private consumption will be one of the main drivers, as households are expected to reduce part of their accumulated savings during the lockdown period. In 2020, household savings amounted to 21% of net disposable income, compared with 16% before the crisis. Economic activity is likely to exceed the pre-pandemic level in the second half of 2021.
Two major risks are threatening the economy in the medium-term. Recently, the Swiss confederation broke off negotiations with the EU on a framework agreement that should regulate the relations between them. The immediate consequences are limited as the 100 and more bilateral treaties remain in force. However, the absence of a framework agreement creates uncertainty for investors on the future relationship. Moreover, it will also hamper the expansion of cooperation in new areas.
The second risk is the movement towards a worldwide minimum corporation tax. In most of the Swiss cantons, the corporation tax is lower than 16%. It is an important argument for attracting new business. If a worldwide minimum tax is agreed, the Swiss cantons will lose this important tool.
