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Swiss economy: Recovery to lose momentum after short-term bounce

Credit Suisse publishes "Monitor Switzerland" for Q3 2020

The unprecedented economic downturn seen in the first half of 2020 is now being followed by a rapid recovery. Credit Suisse's economists therefore stand by their comparatively optimistic prediction of a 4.0% reduction in gross domestic product (GDP) this year. However, the next stage in the recovery is likely to continue at a rather sluggish pace and take the form of a "tilted V". GDP will not return to its end-2019 level until the end of 2021. This subdued economic momentum means that net immigration to Switzerland next year is likely to fall to its lowest level since the free movement of persons was introduced in June 2007. Net immigration in 2020 will likely be only marginally lower than in 2019, partly due to fewer people emigrating. 

The exit from lockdown triggered a rapid recovery of the economy in Switzerland and elsewhere. Swiss households are now spending around two-thirds of the money they saved during the lockdown. Falling prices, coupled with a need to make up lost ground, are creating additional incentives for consumption. This recovery is based on the decisive monetary and financial policy measures taken at the start of the crisis – specifically the extended opportunities to claim short-time work compensation as well as the government-guaranteed COVID-19 bridging credit facilities granted by the banks.

Recovery to lose momentum after short-term bounce
This catch-up effect is nevertheless starting to fade, with the result that the recovery is likely to lose momentum over the coming months. The difficult situation in the labor market – the key determinant of consumer spending – is likely to continue into next year, according to the economists at Credit Suisse. Despite short-time working, the rate of unemployment is set to rise over the coming months. Specifically, Credit Suisse economists expect joblessness to rise from the current level of 3.3% to approximately 4.0% by mid-2021 (2020 average: 3.2%; 2021: 3.9%). Experience shows that this rate of increase will curb consumer growth – but not choke it completely. In addition, the slump in corporate earnings – which, as a proportion of GDP, have fallen to a record low – points to a meager wage round. With prices now likely to stop falling (inflation in 2021: +0.3%; vs. –0.7% in 2020), the purchasing power of wages will actually decrease slightly next year. Further, the recovery is likely to be hampered by the ongoing hit to the global economy from COVID-19 for some time. Credit Suisse economists do not anticipate a second nationwide lockdown; however, they have pointed out that temporary as well as geographical restrictions on mobility will continue to weigh on economic activity.

Industry has turned the corner
The investment climate is also likely to remain subdued for a while in light of the difficult earnings situation for the corporate sector. However, demand for investment in machinery and equipment should pick up slightly on the back of the recovery in industrial activity. To date, investments by the pharmaceutical and chemical industries as well as in IT infrastructure have, to some degree, mitigated the sharp decline in the volume of investment seen elsewhere. Further, the decline in the export of goods has so far been cushioned by the large proportion of exports generated by the pharmaceutical and chemical sector (50%) and its minimal short-term sensitivity to the business cycle. The indications are that this sector will remain a reliable pillar of external trade in the future. Meanwhile, cyclical industries such as mechanical engineering, electronics, and metals (MEM), along with watchmaking, have probably turned the corner. However, the road to normality will be long – particularly in international trade, where transportation capacity and intercontinental mobility are likely to remain restricted for some time.

Switzerland gets off relatively lightly
The impact on Switzerland is likely to be comparatively mild thanks to its relatively favorable sector mix, with a high level of value creation in the pharmaceutical and chemical sector as well as other industries (including commodities trading, but also banking and insurance) that were not directly affected by the restrictions. This is in addition to the proportionate nature of the COVID-19 restrictions that were imposed, as well as rapidly implemented and effective monetary and fiscal policy measures. Credit Suisse economists consequently reiterate their view – which is bullish compared to other institutions – that GDP will decline by a modest 4.0% this year. However, the recovery is not expected to be strong enough to enable GDP to return to its pre-crisis level before the end of 2021 (2021 forecast: +3.5%).

COVID-19 slows immigration beyond lockdown
Although Switzerland's borders were partly closed from March 25 to June 8, 2020, Credit Suisse economists expect net immigration (immigration minus emigration) for the permanent resident population to reach around 50,000 this year – a figure that is only slightly lower than in the previous year (53,000). The fact that the reduction is unlikely to be more significant despite the COVID 19 crisis is attributable to three factors: First, immigration remained extremely dynamic in the first quarter of 2020. Second, the pandemic led not only to a decline in immigration but also to a significant reduction in the number of people emigrating. The search for jobs abroad became much more difficult, as did the search for and move to new homes or apartments. Overall, 20% fewer foreign nationals left Switzerland in the second quarter of this year than in the same period in 2019. Third, a portion of the actual decline in immigration will only be reflected in the immigration figures for the permanent foreign resident population after a time lag. This specifically relates to new short-term arrivals and asylum seekers, the number of which are currently in sharp decline.

Immigration likely to stay subdued in absence of labor-market recovery
To some extent, it is likely to be a while before the impact of the COVID-19 pandemic is reflected in immigration figures. Even so, the economic consequences are likely to be felt right now – for example in the form of lower demand in the real estate market. This is compounded by the fact that the labor market is likely to emerge very slowly from the crisis, even if the pandemic progresses in a favorable direction. Accordingly, Credit Suisse economists anticipate a further reduction in net immigration to a level of around 45,000 in 2021. This would mean net immigration falling to fewer than 50,000 persons for the first time since the free movement of persons was introduced in June 2007.

Net immigration likely to settle at 50,000 in long term
Immigration in the period beyond 2021 is likely to be shaped not only by the state of the economy but also by demographics: Specifically, the ongoing retirement wave among the baby-boomer generation will leave a large gap in the labor market. This is likely to be filled at least partly through recruitment from abroad. If the economy grows in line with its potential, Credit Suisse economists believe an average net immigration figure of just over 50,000 is the most likely scenario for the next few years.

"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 15, 2020.