Study finds Swiss economy is looking up, but risks abound

Risks from the international arena, such as the potential impact of a no-deal Brexit on world trade, threaten to upset exporters' recovery from the 2015 strong franc shock. Keystone

Switzerland's GDP is on track this year to increase by 2.9%, according to a forecast by Zurich's KOF Swiss Economic InstituteExternal link published Wednesday. This positive outlook is tempered by concerns over the potentially negative impact of global trade wars and a no-deal Brexit on the neutral nation.

KOF credits a good performance of the global economy and sustained domestic demand for the economic upturn in Switzerland. It expects the rate of growth to slow slightly in 2019 (1.7%) in line with an expected decrease in the expenditures of international sports federations established in the alpine nation. But GDP (gross domestic product) growth will likely rebound to 2.1% in 2020.

By sector of activity, the KOF is particularly confident in mechanical engineering, the metal industry and tourism – which suffered in 2015 from the sudden appreciation of the Swiss franc – provided that exchange rates remain stable. Retail trade has regained market share and is expected to continue to do so.

On the other hand, the KOF is sceptical in its forecast of the financial services sector, as well as that of the construction industry – a sector that enjoyed uninterrupted growth over the past decade.

More jobs predicted

The authors of the study note that the economic boom has and will continue to have a positive impact on employment. The number of full-time equivalents is expected to increase by nearly 2% in the current year. The rate of those officially registered as unemployed this year will be 2.7% and over the next two years it will remain stable at 2.5%.

The Zurich experts found that the Swiss franc’s weaker exchange rate against the euro over the past year or so has helped boost the profitability of domestic companies that compete with firms abroad. They anticipate a stabilisation of the euro at around CHF1.13.

Possible interest rate hike

The forecast does not rule out an increase in interest rates by the end of 2020. It notes that the European Central Bank (ECB) is unlikely to make such a move before the autumn of 2019. The Swiss National Bank (SNB) is likely to take the initiative on that front before its European counterpart.

Risks to the Swiss economy continue to come from the international arena. These include a potential slump in world trade as a result of trade wars that could hit Switzerland hard.

“With the possibility of a no-deal Brexit looming and the potential revival of concerns about the stability of the euro, the Swiss franc – a traditional safe-haven currency – could appreciate sharply, thereby choking Swiss exporters’ recovery from the 2015 appreciation shock,” the authors warn.