But first the figures: it is not the first time that the Swiss economy has “frozen” for a quarter, as it already happened at the end of last year. At the beginning of this one, in the first quarter of 2023, GDP grew by a symbolic +0.9 percent, which reassured analysts somewhat, according to data from the State Secretariat for Economic Affairs SECO. With the current slack, the Manufacturing and Construction sectors are pulling down the most, with -2.9 percent and -0.7 percent, respectively.
One factor in this was the marked decline in the chemical and pharmaceutical industry (−2.3%), which had been moving more or less sideways from the high-growth years of 2015 to 2022. At the same time, the tough foreign environment is putting pressure on industries that are sensitive to cycles, like metal construction and mechanical engineering.
This is causing the rest of the industry’s value added to drop in the second quarter. This was also shown by a general drop (1.2%) in the sale of goods to many different countries and types.
Strong Swiss currency – a drag on the growth rate
In terms of pure value, the franc has only been this strong against the euro once before, around a year ago. That’s not all; it’s also very strong against the dollar—the record was set in July.
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When currencies are weak, business done abroad is worth less when you get back home. This makes it hard to see how well a business is doing, and it can be a big problem if Swiss export companies have to pay big bills in francs. For instance, because they make and buy a lot at home.
It’s not a surprise that they are strong. Because growth in other European economies has slowed down, Aaron Hurd, a foreign exchange expert at asset manager State Street, says to NZZ, “The franc is a great hedge against stagflation. It’s a safe haven“. The dollar, on the other hand, was being traded for francs by investors who were betting that US interest rate hikes would stop.
Prospects for the Swiss economy – below-average growth
If we had asked economists in June about their expectations for the Swiss economy, the answers would have been significantly more positive than today. Dressed up in data, the forecasts for 2024 are for 1.2% economic growth, up from 1.5% in June. „This would mean significantly below-average growth for two years, without however driving the Swiss economy into recession“, says an expert from SECO.
International inflation could stay high for even longer, which would require a tighter monetary policy. This would slow down demand around the world even more. In addition, the risks that come with global debt, housing, and financial market corrections, and the balance sheet risks of financial institutions could get worse. It’s also possible that tighter monetary policy will have a bigger effect on the real economy than is currently thought.
Changes in Germany and China are making the world economy and Swiss trade with other countries more vulnerable. For example, Germany’s industry sector could weaken even more than expected, which would slow down the vulnerable parts of Switzerland’s economy even more than expected. Also, China’s economy might slow down faster than expected because of the real estate problem, the country’s high debt level, and people’s and businesses’ negative moods.
Stable finances and a buffer against worse times
However, we are obliged to say that outside force majeure international circumstances, a recession is unlikely. At the same time, the Swiss economy is one of the least indebted in Europe, as a brand new study makes clear.
The Swiss cantons’ finances are still stable, which is not the case in many EU countries. A new study from BAK Economics shows this to be true. Even though COVID-19 steps have caused debt to rise in many places in Switzerland, it has done so less than in many other places.
Because of this, the low tax rate in the Swiss cantons, which is very appealing compared to other countries, will be able to last for a long time. If a country meets the criteria for economic sustainability, it may affect its tax policy in the long run. Places with long-term fiscal strategies can keep their taxes the same over time. In the future, places with more debt might have to raise their taxes to pay for things.
