GDP is projected to grow by 0.6% in 2023 and 1.4% in 2024. Repercussions from Russia’s war of aggression against Ukraine will further weaken foreign demand and thus slow trade and investment. Low consumer confidence will moderate consumption. Rising electricity prices and wages will keep headline inflation above the Swiss National Bank’s target range in 2023, before moderating in 2024. Disruptions to industrial production due to natural gas or electricity shortages and a stronger weakening of global demand are key downside risks to activity.

Monetary policy will need to be tightened further to contain core inflation and to ensure that long-term inflation expectations remain anchored. Fiscal consolidation should proceed as planned, but targeted measures to assist vulnerable refugees are warranted. Structural reforms are needed to boost labour market integration, remove barriers to competition, and raise energy efficiency to help ensure energy security and improve environmental sustainability.

Economic growth has slowed. Real GDP rose by 0.3% in the second quarter of 2022, primarily driven by the recovery in services as remaining COVID-19 restrictions were lifted. Consumer confidence is at a record low amid heightened uncertainty surrounding the war, rising energy prices and elevated inflation. The KOF Economic Barometer remains subdued and the manufacturing PMI has declined. The labour market remains very tight, with low unemployment and a high number of vacancies. Headline inflation was 3.0% in October 2022, the highest rate since 2008, driven primarily by prices of energy and imported goods, while core inflation moderated to 1.8%. Medium-term inflation expectations remain below 2%, within the target-range of the Swiss National Bank.

Natural gas makes up 15% of Swiss energy consumption and about half was imported from Russia prior to the war. Although energy prices have risen sharply because of Russia’s invasion of Ukraine, Swiss households are less affected than other Europeans insofar as energy accounts for a smaller share of their consumption expenditures. The government has not yet announced any support packages for households or firms to offset high energy prices, but steps have been taken to reduce natural gas use during the upcoming winter. In the event of shortages, companies equipped with dual-fuel installations may be ordered to switch away from natural gas to oil. The use of gas for specific purposes would be restricted (room temperatures could for example be capped) or prohibited. All installations that are not considered “protected consumers” (households, essential social services, district and heating facilities serving households) would be subject to a quota in case of severe shortages. Plans are also being prepared to reduce electricity use in the event of shortages.

The Swiss National Bank has raised interest rates by a cumulative 125 basis points since June 2022, to 0.5% in September 2022, after seven years of negative interest rates. The authorities remain willing to intervene in the foreign exchange rate market to ensure that the value of the Swiss franc is consistent with appropriate monetary conditions. As inflationary pressures are building up and global interest rates are rising, policy interest rates are assumed to increase to 2.0% by the second quarter of 2023 and to remain at that level throughout the projection period. The federal government has continued to scale back COVID-19-related fiscal support as the economic situation has improved. A fiscal surplus is expected in 2023, with further budgetary consolidation in 2024.

Real GDP growth is projected to moderate to 0.6% in 2023 and 1.4% in 2024. This mainly reflects the negative impact on global growth from Russia’s war in Ukraine, hampering exports and slowing domestic demand. A progressive reduction of the high saving rate is projected to support private consumption over the next two years. Pressures from the tight labour market and high energy prices will keep headline inflation above the central bank’s target range in 2023, before it gradually falls to 1.5% in 2024. However, the rationing of natural gas in the event of severe supply disruptions would adversely affect industrial production. Additional disruptions in global supply chains could also further weaken economic activity and raise inflation. Moreover, close monitoring of financial risks related to the real estate market and rising interest rates is warranted.

Fiscal policy should continue to provide support to the roughly 68 000 Ukrainian refugees (0.8% of the population) that have arrived in Switzerland since the onset of the war. The planned fiscal consolidation should progress. Simplifying and speeding-up the process for recognition of foreign qualifications and increased access to training programmes will raise participation in the labour market. Boosting labour market integration of under-represented groups and removing barriers to entry would help sustain the recovery and improve inclusiveness. Further investment in renewable energy and infrastructure for electric vehicle mobility would reduce reliance on the gas and oil markets and enhance energy security.

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