Switzerland was in recession during the first semester of 2003, having been hit harder than the majority of the other OECD countries by the sluggishness of international activity since 2000-01, despite a rebound of activity in the third quarter of 2003. This is partly due to the nature of the downturn, which has strongly affected sectors that are particularly important to the Swiss economy. However, these poor results also reflect the negative trend growth differential that has existed for some time vis-à-vis other countries. Against this background, the most immediate challenge for the authorities is to create conditions that will support the recovery as foreign trade picks up. This chapter reviews recent developments in the Swiss economy and also, more generally, highlights the reasons for the poor medium-term growth performance. It goes on to assess the role of fiscal and monetary policies in the present phase of the cycle, and also their room for manœuvre and effectiveness should deflationary pressures fail to abate. Finally, the chapter reviews the main challenges that low trend growth poses for the economy...