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After decelerating during 2019, economic growth is projected to pick up in 2020-21. Private consumption will remain resilient, supported by low unemployment. A gloomy global environment will weigh on investment and trade, but the current account surplus will remain large. International sporting events will boost service exports and thus growth in 2020. Inflation will be subdued following the recent currency appreciation but inch up in 2021.

Monetary policy will remain very accommodative, with the policy rate set to stay at -0.75% in the coming two years. Fiscal policy will be expansionary in 2020. Reforms are necessary to cope with population ageing and sustain high well-being. Increasing the statutory retirement age would reduce future public expenditure, limit the expected fall in the labour force and help maintain retirees’ living standards.

Growth has slowed

Headline GDP growth has declined sharply in 2019, partly because of the effects of biannual international sporting events that impart a sizeable boost every even year. This is due to the related licences, patents and rights being recorded as service exports in Switzerland because it hosts the respective international bodies. However, weak investment and the gloomy global environment are also dragging down growth, with business and consumer confidence below their long-term averages.

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Sporting events, gdp and consumer price inflation: Switzerland
Sporting events, gdp and consumer price inflation: Switzerland

Source: State Secretariat for Economic Affairs; and Federal Statistical Office.

 StatLink https://doi.org/10.1787/888934045981

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Switzerland: Demand, output and prices
Switzerland: Demand, output and prices

 StatLink https://doi.org/10.1787/888934046912

The unemployment rate remains low and wage growth is picking up. Inflation is subdued because of falling domestic and imported inflation. Recent currency appreciation is hurting competitiveness outside of less price-sensitive sectors like pharmaceuticals, but the current account surplus remains sizeable.

Macroeconomic policy is set to become more expansionary

Monetary policy has been expansionary since the global financial crisis, and the reference rate has been negative since 2015, at around -0.75%. Low interest rates affect bank net interest margins as well as the returns of pension funds and life insurers. Part of banks’ sight deposits at the central bank are exempted from negative rates, reducing the burden on the banking sector; the threshold was raised in November. Lower returns lead to rising real estate exposures of financial institutions. House prices continue to outpace rents and income, and mortgage lending has picked up. Despite the recent tightening of bank self-regulation on maximum loan-to-value ratios, a formal framework setting lending limits is needed, with enforcement on a comply-or-explain basis.

Fiscal expansion in 2020 will lower the budget surplus, as a corporate tax reform reduces tax revenues. Low public debt provides fiscal space to stimulate the economy if needed. However, population ageing will exert pressure on pension and health spending in the medium term. Equalising the statutory retirement age for both sexes at 65, and then gradually increasing it to 67 and linking it to life expectancy would support the pension system as well as growth and incomes. Shifting the tax mix towards value-added taxes and away from personal income taxes would reduce the exposure of government revenues to ageing. The planned cut in second earners’ income tax will lower work disincentives.

Skill shortages are growing, notably in IT-related fields, hampering firms’ expansion and the absorption of new technologies. Easing procedures for non-EU immigration would attenuate skill shortages. Promoting scientific and technical courses, particularly among women, would also add to supply in the medium term. Re-skilling and upgrading skills can reduce shortages and avoid workers being left behind in the digital transformation.

External factors will exert a drag on growth

Growth is projected to remain modest in underlying terms as the gloomy global environment weighs on trade and investment. However, the influence of international sporting events will boost headline growth in 2020 and depress it in 2021. Private consumption will gain strength, supported by low unemployment and renewed wage growth. Switzerland’s economy could cope with low global trade growth better than projected thanks to its growing specialisation in pharmaceuticals, although more labour-intensive export sectors could lose ground. An escalation of global trade tensions with further repercussions for Europe could have significant spillovers to Switzerland’s export-oriented sectors. Uncertainty regarding negotiations over an institutional framework agreement with the European Union could damage business confidence and investment.

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