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Swiss economy: Lockdown savings will boost consumption again

Credit Suisse publishes its ‘Monitor Switzerland’ for Q1 2021

The Swiss economy is expected to experience a broad-based recovery this year. Credit Suisse economists still anticipate economic growth of 3.5% as well as a further rise in consumer spending, boosted from the fact that a majority of Swiss households have again accumulated a savings surplus during the second wave of the COVID-19 pandemic . Non-food retailing is likely to be the biggest beneficiary. Although economic output will probably return to its pre-crisis level by the end of 2021, the overall loss of prosperity due to the pandemic nevertheless remains considerable.

Switzerland's gross domestic product (GDP) shrank by 2.9% last year – which is similar to the strong decline seen during the 2009 global financial crisis (-2.1%). The economy has been on something of a rollercoaster ride: A record decline in the second quarter of 2020 was followed by the fastest-ever recovery in the third quarter, which then lost steam again in the final three months of 2020. According to estimates by Credit Suisse economists, output will actually decrease again slightly in the first quarter of 2021 (forecast: -0.5 %) before a gradual acceleration begins as we head into the summer. For 2021 as a whole, Credit Suisse economists have reiterated their forecast of 3.5% growth in GDP (April 2020 forecast).

Economic yo-yoing to give way to sustained recovery in Switzerland
There are various reasons why the impact of the pandemic on the economy is significantly less severe this time round than it was during the first wave:

  • First, the world economy is in much better shape than it was a year ago. In particular, many Asian countries – accounting for around 30% of global demand – have the pandemic largely under control and the recovery is proceeding apace. In addition, the massive fiscal stimulus in the US is expected to boost the demand for goods around the globe. The recovery in Switzerland's highly export-driven industrial sector is therefore set to continue.
  •  Second, an end to the pandemic is in sight as a result of vaccinations and increased testing. The knowledge that the end of the crisis is on the horizon is one reason why we will not see a massive wave of redundancies despite weak business activity. Credit Suisse economists expect the unemployment rate to peak at 3.7%. 
  • Third, the measures taken to protect people's health as well as the economy are already established and in force. With more knowledge about the virus, the wearing of masks, as well as existing safety concepts, private households and companies have learned to organize their activities in a more ‘COVID-compliant’ way. For example, mobility has fallen less sharply than it did during the first wave, while the impact of mobility on the economy has diminished.
  •  Fourth, the measures taken to counter the spread of the virus in the second lockdown were less rigid but more targeted; this has helped lessen the yo-yo effect in private consumption.

‘Excess saving’ estimated to be two-thirds lower than during first wave
Households have saved above-average amounts of money during lockdown; this is because payments from government and unemployment insurance mean incomes are falling less sharply than consumption – which is being squeezed by the measures taken to contain COVID-19. According to estimates from the Credit Suisse economists, the savings ratio – i.e. the proportion of income that a household saves after deducting all spending – was almost twice as high during the first lockdown as in normal times, with each household having saved an additional sum of nearly CHF 3,000. Thanks to the less restrictive lockdown measures and reduced drop in income compared with the first wave, the total amount of lockdown savings being generated now is lower than it was the first time round. Credit Suisse economists estimate that the average household has saved approximately an additional CHF 880 during the second lockdown.

Three months for non-food retail to return to pre-crisis levels
Due to lower pent-up demand and the fact that the preceding decrease in consumption was less severe, it can be assumed that the recovery that follows the easing of restrictions will be less rapid than last year. In addition, not all consumer sectors will benefit from the catch-up effect to the same extent. According to the analysis conducted by Credit Suisse economists, the return to pre-crisis levels will take longest in those consumer sectors in which the restrictions were particularly severe and prolonged (e.g. hotels catering largely to international visitors) as well as those where lost consumption cannot easily be compensated for (e.g. catering and the leisure industry). While non-food retailing may be able to offset the temporary loss of consumption from one week of the 2021 lockdown with approximately two weeks of pent-up consumption, it takes the entertainment and sports segment around eight weeks on average. Even though Switzerland's catering sector will initially enjoy a surge in demand after it reopens, it seems unlikely that customers will sustainably increase the number of their restaurant or bar visits to compensate for the consumption they have forgone. Without pent-up consumption, it will probably take around 14 weeks of normal operation to offset the loss of consumption from a single week of this year's lockdown. It is the hotel trade that is furthest away from a return to normal operation. Future developments in the hospitality sector will depend on the extent to which border restrictions remain in force. If travel within Europe becomes possible again at least in the summer, the Swiss hotel sector can expect the Swiss to increasingly spend their summer and fall vacations abroad again. Some of the boost from domestic tourists is therefore likely to be lost again in 2021. A return to normal operation will only be possible once international travel activity has returned to its pre-crisis level. Credit Suisse economists think it is unrealistic to expect this before mid-2022.

Economic acceleration – but no sign of a full recovery
Overall, however, the recovery in 2021 will be significantly more broad-based than that of summer 2020. Output is therefore likely to return to its pre-crisis level by the end of the year. According to Credit Suisse economists, the loss of prosperity caused by the COVID-19 pandemic is nevertheless enormous. Taking into account the growth lost during this period, they estimate the hit to GDP from the pandemic to be around CHF 36 billion in 2020, and around CHF 21 billion this year – resulting in a total of around CHF 57 billion (approximately 8% of GDP in 2019). Based on this method of calculation, the gap in growth ga caused by COVID-19 is unlikely to be closed fully even by the end of 2022.

‘Monitor Switzerland’ is published quarterly and is available online in English, German, and French at: www.credit-suisse.com/monitorswitzerland

The next issue will be published on June 15, 2021.