Economy and Trade
Switzerland is an open economy with one of the highest standards of living in the world, low unemployment, and a highly skilled labor force. Switzerland’s economy benefits from a highly developed services sector, led by financial services, and a manufacturing industry that specializes in high-technology, knowledge-based production. Switzerland is a net exporter. Major merchandise exports include machinery, chemicals and pharmaceuticals, watches, jewelry, and telecommunications, while the main services exports are in the banking and insurance sectors. Farm subsidies are the highest in the world, with some Swiss farmers receiving support equivalent to three-quarters of the value of production. Switzerland remains a safe haven for investors, because it has maintained a degree of bank secrecy, while the franc has traditionally been one of the world’s strongest currencies.
The global financial crisis and resulting economic downturn is likely to tip Switzerland into recession in 2009, particularly given the relative size of its services sector and as global export demand stalls. Switzerland’s largest banks suffered significant losses in 2008, and the country’s largest bank (UBS) accepted a government rescue deal in late 2008.
Economic Policy over 12 Months
Faced with severe financial sector pressures in 2008, the authorities responded with broad stabilization measures commended by the IMF. The Swiss National Bank (SNB) created a fund (the StabFund) to acquire distressed assets, including a US$16.4 billion purchase of UBS’s toxic assets in December 2008. The injection of government capital eased market concerns about the bank’s solvency, while enhancing the deposit-protection scheme addressed the risk of a wider loss of confidence in the banking sector. The government made clear its readiness to take other measures, including guarantees, if necessary, for bank borrowing.
At the same time, the Federal Banking Commission introduced new capital-adequacy targets to encourage a further reduction in the largest banks’ risks over time, although both UBS and Credit Suisse have until 2013 to comply. Action by the authorities has been accompanied by measures taken by banks themselves, to reduce balance sheet size and build up liquidity buffers.
Supported by recent years of strong growth, fiscal consolidation has resulted in general government surpluses, and a declining stock of public debt. In 2008, although the debt stock rose as a result of large one-off expenditures, the federal government’s surplus increased again. Over 2009, however, the fiscal situation is expected to deteriorate rapidly as the recession deepens.
The Swiss government’s key economic priority is to address the expected recession in 2009. The Swiss National Bank cut interest rates in December 2008, in response to company retrenchments, faltering export demand, slumping consumer confidence, and tight credit conditions. Other measures to boost GDP growth include improving competition policy, and reducing high price levels by liberalizing sectors such as electricity, energy, telecommunications, and postal services.
With a high inflation rate in the first three quarters of 2008, the SNB kept the monetary stance unchanged, offsetting the increase in risk premiums through lower repo rates. Concurrently, timely infusions of liquidity in interbank markets, use of repos with maturities up to one year, foreign exchange swaps, and new refinancing facilities lowered risk premiums, and eased upward pressure on the currency. With the economy slowing towards the end of 2008, inflationary expectations falling, and the currency appreciating, the SNB moved forcefully, relaxing the monetary policy stance by 2.25% over a period of about two months at the end of 2008. The establishment of a new integrated supervisor (FINMA) at the beginning of 2009 provided an opportunity to strengthen financial supervision further.
Economic Performance over 12 Months
In recent years, the Swiss economy has experienced high growth, low unemployment, and modest inflation, with strong fiscal and external positions. However, its openness, both in trade and financial relations, meant that the domestic economy could not be isolated from foreign shocks.
The global financial crisis has led to a downgrading of Switzerland’s economic growth forecasts in 2008 and 2009. Switzerland’s significant financial sector has exposed the Swiss economy to the global crisis, with international financial giants UBS, Swiss Re, and Credit Suisse writing down tens of billions of dollars in toxic assets. The key metals, machinery, and electronics industry saw a sharp fall in new orders, as the list of victims of the slowdown expanded beyond the banking sector.
More recently in 2009, fears have grown about Swiss banks’ exposure to the growing risk of default across much of Eastern Europe, as Swiss banks lent a significant proportion of money in the region. Swiss GDP growth eased to 1.8% in 2008, and the economy is forecast to contract by around 1.8% in 2009, due to lower investment and weaker export demand (Economist Intelligence Unit, February 2009). Unemployment reached 3.4% in February 2009, the highest rate in three years. Inflation is forecast to fall to a negative 0.2% in 2009, from 2.5% in 2008. The Swiss National Bank cut official interest rates to 1% in December 2008, and to 0.5% in January 2009. The country’s Swiss Market Index was dragged down by the banking sector’s woes, ending down 33.5% in 2008.
The decline in economic activity has influenced demand for loans, and lending conditions have tightened in line with the deterioration of the cycle. However, the deleveraging of the two big banks has not affected domestic lending. Demand for mortgages remains high, reflecting long-term rates that are at historically low levels, as well as still-strong employment. Ample liquidity in the banking system, high credit standards, and the absence of a housing bubble have supported mortgage credit.
Economic activity is expected to contract somewhat in 2009, due to poorer export prospects, and a diminished contribution of financial services, followed by a rebound in 2010 as global financial market turbulence abates. Inflation is projected to decline further in 2009, with a few quarters of negative rates due to temporary factors. Reduced profits of Swiss multinationals abroad, including in the financial sector, are narrowing the current account surplus. As financial services contribute more than 12% to Swiss GDP, a prolonged decline in global activity in this sector would directly affect economic growth, and tax revenues.
Support for Inward Investment and Imports
The Swiss authorities have a laissez-faire attitude towards investment. However, the government does support infrastructural investment (tourist facilities, communications, and training facilities) with subsidized loans up to 25% of a financing package. At the cantonal level, a wide variety of investment support is available. The types of support available include assistance or subsidy with land or premises, waiving of work permit requirements, tax holidays up to 10 years, cheap energy, and training subsidies.
Most cantons grant tax holidays to companies bringing economic value-added functions and creating significant new jobs for up to ten years. Further information can be obtained from DEWS.
GDP growth: 1.8% (2008, Economist Intelligence Unit)
GDP per capita: US$40,900 (2008, est.)
CPI: 2.4% (2008, est.)
Key interest rate: 0.5% (January 2009, Swiss National Bank)
Exchange rate versus dollar: Swiss franc (CHF) per US dollar—1.0774 (2008, est.)
Unemployment: 3% (December 2008)
FDI: US$333.8 billion (2008, est.)
Current account deficit/surplus: US$40.81 billion (2008, est.)
Population: 7,581,520 (July 2008, est.)
Source: CIA World Factbook except where stated