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Swiss economy in 2020: Fears of recession exaggerated – consumer spending supports growth
In view of the significant slowdown in economic growth and the more somber outlook for large parts of industry, the economists at Credit Suisse have revised their forecast for Swiss economic growth. They now expect growth of 1.1% (previously 1.5%) for 2019 and 1.4% (down from 1.8%) for 2020. However, there are no signs that the economy will slide into recession as consumption remains robust and low interest rates continue to fuel construction investment. Today's study also looks at how the impending wave of baby boomers reaching retirement age will further exacerbate the shortage of specialists in sectors such as healthcare.
The Swiss economy is unable to escape the slowdown in global industrial activity: The Purchasing Managers Index (PMI) for industry produced by Credit Suisse in collaboration with procure.ch will soon have been below the growth threshold for six months. In parallel, the Credit Suisse Export Barometer puts industrial activity in the destination countries for Swiss exports at its weakest level in seven years. This situation has been compounded by the appreciation of the Swiss franc against the euro. According to the economists at Credit Suisse, the difficulties facing the mechanical engineering, electronics, and metals industry (MEM industry) should not obscure the fact that two-thirds of Swiss exports now comprise consumer goods, which continue to benefit from stable global growth in consumption. Overall, growth in Swiss exports is therefore likely to slow, but there is currently no reason to fear an actual collapse in export volumes. However, subdued demand for exports generally goes hand in hand with a sluggish propensity to invest, which is why little additional growth is to be expected in the area of capital spending on machinery and equipment.
Contagion risk to labor market is low
Although there is a threat of job cuts in the MEM industry, the economists at Credit Suisse do not expect a widespread rise in unemployment in Switzerland. The robust labor market is one important reason why private consumption will continue to increase. In addition, consumption growth should be supported by a renewed increase in healthcare spending and the continued slight rise in spending in the "residential" sector, as well as by solid purchasing power on the back of low inflation, and the persistently high level of immigration. Consumption growth in 2019 and 2020 is nevertheless expected to be relatively modest at around 1%. In contrast, an accelerated rise in construction investment (+1.2%) is likely in 2020, following a brief cooling-off period in the construction sector this year (+0.6%). Order books are well filled despite a lower number of building permits and regional oversupply, reflecting continued strong investment in construction projects due to record-low interest rates.
"A full-blown recession that spills over into the service sector does not therefore seem likely, despite weak activity in many sectors of industry," says Oliver Adler, Chief Economist Switzerland at Credit Suisse. "As in 2019, the Swiss economy is expected to grow at a rate of slightly above 1% in 2020."
SNB expected to leave rates unchanged for now
Despite the interest rate cut by the European Central Bank (ECB), the economists at Credit Suisse continue to believe that the Swiss National Bank (SNB) will keep its key interest rate unchanged at -0.75% at Thursday's quarterly monetary policy assessment. The SNB is still expected to intervene in the foreign exchange market if the upward pressure on the Swiss franc should become too strong. However, given the Swiss franc's current popularity as a "safe haven", a short-term fall in the EUR/CHF exchange rate to 1.05 seems realistic.
Aging enters a decisive phase
As part of the study published today, the economists at Credit Suisse have also analyzed the impact of the impending wave of baby boomers reaching retirement age. The members of this generation, born between 1946 and 1964, who have shaped economic, societal, and political developments in Switzerland over the last few decades, are now gradually entering retirement, leaving a not-insignificant gap in the labor market. The economists at Credit Suisse estimate that around 1.1 million people will reach retirement age in the next ten years. In relation to the active population, this means that approximately 833,000 economically active persons (including the unemployed) and almost 800,000 gainfully employed persons will retire from working life.
By 2021 the number of economically active persons retiring will already be greater than the number of 20-year-olds joining the labor force, according to Credit Suisse forecasts. The sectors most dependent on that generation are agriculture, traditional industry, the transportation and shipping industry, as well as administrative and social services. In view of their growth momentum, particularly in healthcare, and their comparatively low automation potential, the latter sectors have are less likely to be able to make up the ensuing shortfall in employees. As a result, they will tend to be faced with an even-greater shortage of skilled professionals.
"Monitor Switzerland" is published quarterly and is available online in English, German, and French at: www.credit-suisse.com/monitorswitzerland
The next issue will appear on December 17, 2019.