Economic insights Swiss economy flying high

Editor: Theresa Knell

The Swiss economy is in a high phase. This year, GDP will probably increase by a considerable 2.9%, which will also lead to a fall in unemployment.

The Swiss economy is flying high and the ETH’s economic research establishment (KOF) is adjusting its Swiss GDP forecast for 2018 upwards from 2.3% to 2.9%.
The Swiss economy is flying high and the ETH’s economic research establishment (KOF) is adjusting its Swiss GDP forecast for 2018 upwards from 2.3% to 2.9%.
(Source: Pixabay)

The Swiss economy is in a high development phase. The good condition of the global economy and domestic economy are providing positive impulses for Swiss economic development. Capacity utilization in industry has not been this high since 2011. The strong economic output is extensively supported, both industry and the services sector were able to expand their output. KOF (Swiss Economic Institute) is revising its GDP (Gross Domestic Product) forecast in 2018 from 2.3% to 2.9%.

Domestic market in a good condition

Domestic private consumption is strongly influencing the good economic development. Therefore it will continue to develop in a stable fashion during the forecast period: A solid development of income with slightly increasing wages supports the growth of private consumption. Because prices will increase less than nominal wages, there will be a slight increase in real wages.

The expansion of the world economy will also accelerate slightly in the second half of 2018. As of 2019, economic development will slacken somewhat.

MEM Industry racing to catch up

The positive development should continue throughout the industrial branches. The industries most affected by the revaluation of the frank in 2015, machine construction and metal processing, as well as tourism service providers, have recovered very much recently and, with the underlying stable development of exchange rates, can expect a further increase in their output. The retail sector has recovered some of its market shares and, according to the current KOF forecast, will expand further. KOF is more skeptical about the financial services sector, and the construction industry, which has been able to increase its output every year since 2007, has now reached a turning point. KOF expects a stagnation of value added in the construction industry over the next few years.

Profound unemployment

The economic upswing has also made an impact on the labor market: Employment is rising (2018: +1.9% in terms of full time) and the number of persons unemployed is falling. This year, the percentage of unemployed persons registered with employment offices will be 2.7%, and over the next two years will remain stable at 2.5%. During the forecast period, the rate of unemployment according to the international comparative definition of the ILO (International Labour Organization) will sink from 4.7% this year to 4.4% in the coming two years.

Forecasts until 2020

KOF expects that increases in GDP, fed by economic development, will fall during the forecast period until the end of 2020. Although GDP should increase by 1.7% in 2019 and by 2.1% in 2020, the lower figure for 2019 is attributable not to economic development, but to the lower revenues of international sports associations based in Switzerland.

Stable exchange rate, stable interest rates

The lower frank-euro exchange rate in force since slightly more than one year has contributed to increased profits of enterprises which compete with foreign suppliers. During the forecast period, KOF expects a stable exchange of 1.13 francs to the euro. Due to the good commercial situation, an increase in interest rates is possible. In the eurozone, however, short-term interest rates should be clearly negative for another year. Therefore, an earlier increase in Swiss interest would involve the risk of a revaluation. Consequently, KOF does not expect the Swiss National Bank to increase its interest rates sooner than the European Central Bank, Long-term interest rates, which have again sunk recently, will tend to rise already at the turn of the year. However, the increase will be slow, so that the yield for 10-year federal bonds will remain less than 1% until the end of the forecast period.

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