Economic Forecasts for Switzerland: Weaker in 2016, But No Slump
Articles & stories

Economic Forecasts for Switzerland: Weaker in 2016, But No Slump

Credit Suisse is leaving its growth forecasts for the Swiss economy unchanged at 0.8 percent for 2015, and 1.2 percent for 2016. Despite the strength of the Swiss franc, there is little prospect of an actual economic downturn. In the fall 2015 edition of "Monitor Switzerland," Credit Suisse's economists also provide answers to 11 questions about Switzerland's future. For example, the healthcare and social services sector is likely to be Switzerland's largest employer by 2030.

Despite the franc shock, the Swiss economy has not slid into recession. On the one hand, this is due to the continued strength of the domestic economy. On the other hand, many exporters issue their invoices in foreign currencies and have absorbed reductions in their margins in order to retain market share. Reductions in margins are usually associated with a slow but prolonged rise in the unemployment rate. Accordingly, Credit Suisse's economists expect the unemployment rate, which currently stands at 3.3 percent, to rise to 3.7 percent in 2016.

Labor Market Makes the Difference between Recession and Growth

The economists consider that a rise of this scale in the unemployment rate will slow growth in consumer spending but not halt it completely since it is supported by a number of factors. Firstly, immigration is likely to fall only marginally. An analysis carried out by Credit Suisse's economists shows that over 25 percent of consumer spending growth in the last six years was due to immigration. Accordingly, the economists expect that immigration will also contribute more than a billion francs to consumer spending growth in the coming year. Secondly, with inflation expected to be 0 percent, a rise of just 0.5 percent in salaries should result in increased purchasing power of almost 2 billion Swiss francs (although some of this is likely to flow abroad). Thirdly, low mortgage rates are easing the budgets of both homeowners and also some tenants, since rents are linked to interest rates. Fourthly, falling prices encourage consumers to spend. For example, substantial discounts on cars tend to result in an increase in new vehicle registrations. Consumer spending in 2016 is therefore likely to rise by 1 percent compared with 2015, only marginally less than in the current year (1.1 percent).

No Major Changes Likely in Investment Behavior in 2016

Credit Suisse's economists are forecasting a 1.6 percent increase in capital spending on machinery and equipment for 2016 (2015: 1.8 percent) along with 1 percent growth in construction investment (2015: -1.2 percent). Low interest rates and high equity valuations combined with rationalization pressures are likely to boost capital spending on machinery and equipment, but the prevailing uncertainty and reduced earnings in the export sector will act as inhibitors. According to the economists' forecasts, real exports will rise by 2 percent in 2016 (compared to a fall of 0.5 percent in 2015). The economic environment should continue to ease, particularly in the euro zone, and US growth is likely to remain robust. The exchange rate situation is also likely to ease for the export sector thanks not least to the continued imposition of negative interest rates by the Swiss National Bank and its sporadic foreign currency purchases.

Potential Growth to Fall from 2 percent to 1.6 percent by 2030

Against the backdrop of demographic aging, the associated weakening in labor supply and the threat of limits on immigration, boosting productivity is becoming a more and more important growth driver. In their basic potential growth scenario up to 2030, Credit Suisse's economists expect labor productivity to rise at about the same average rate as in the period from 1998 to 2012. However, this will require an increased willingness to invest. Furthermore, immigration would have to amount to between 40,000 and 50,000 people per year, and the domestic labor force potential must continue to rise. Even given these relatively optimistic assumptions, however, the economists see potential growth falling from around 2 percent today to 1.8 percent in 2020 as a result of demographic factors. The growth rate is then expected to fall back even further to 1.6 percent in 2030.

Where Will We Be Working in 15 Years?

In 2014, one in eight people was employed in healthcare and social services and one in six in industry. By 2030, according to a model calculation carried out by Credit Suisse's economists, it is likely to be the other way round. This assessment, which is based on employment trends since 1991 combined with the basic potential growth scenario, indicates that Switzerland will have around 250,000 more people in work in 2030 than at the end of 2014 (3.6 million). For the healthcare and social services sector this will mean an increase of nearly 200,000 jobs, while the number of people employed in industry will fall by 100,000. Information technology will see growth of around 60,000 jobs, while an additional 70,000 new jobs will be created in management consultancy. Technological change only enters the economists' forecast through past changes projected into the future. Nonetheless, even in sectors which have not experienced significant technological change in the past, fundamental changes are possible or, as in the case of the healthcare system, could become necessary in the next 15 years. According to the economists at Credit Suisse, if the demand for healthcare services remains at current levels, there will be a shortfall in the supply of labor to the healthcare sector. This implies that labor productivity will have to rise.

Healthcare Spending Rises for Good Reasons

As a detailed analysis of the healthcare system in "Monitor Switzerland" shows, the growing importance of this sector is due in part to the changing preferences of a wealthy and aging society and is therefore not necessarily a bad thing from an economic point of view. Credit Suisse's economists estimate that in the period 1997-2012 population growth and aging accounted for more than a third of spending growth in the healthcare sector. There are, however, many inefficiencies. For example, the demand for healthcare services is often supply-led. Furthermore, the necessary increase in labor productivity will be difficult because of the high staffing levels required in this sector. However, the economists come to the conclusion that increases in productivity in the long term would be entirely possible thanks to information technology (e.g. e-health), improved organizational structures (e.g. networked group practices) and appropriate incentives (e.g. more competition among hospitals).

Various Aspects of the Swiss Economy in a Single Publication
The current issue of "Monitor Switzerland" contains economic forecasts for 2016 and answers to the following questions:

How strong will the Swiss franc remain?
The Swiss franc has risen by approximately 56 percent against the euro since 2007 and is therefore extremely strong. Exchange rates overshoot at times, but the imbalances tend to partially level out again over the long term.

Where is Switzerland growing?
The structural shift toward services is tending to centralize jobs geographically. However, most new housing is being built in the suburbs. Commuter numbers and the burden on infrastructure will increase, which means that political action will be required.

Is a new watch crisis imminent?
The boom in the Swiss watch industry is showing signs of stalling. The industry is suffering from weak demand in key markets. The rise of "intelligent" watches represents a real challenge.

Swiss financial center: good growth prospects after restructuring?
The financial center faces challenges caused by the "loss" of bank client confidentiality, higher capital requirements, and the low interest rate environment. However, growth opportunities remain in the asset management business in particular, especially in Asia, but also in Europe.

More consumption thanks to rising property prices?
Residential property is becoming an increasingly important factor in the assets of Swiss households. However, rises in prices and valuations in recent years have had little impact on consumption and can in fact impede it.

What is parliament focusing on?
The main concerns of the Swiss parliament often have little to do with the economic importance of individual areas. "Too little" parliamentary attention, however, is not necessarily harmful.

"Monitor Switzerland" is published quarterly. The next issue will appear on December 15, 2015.

"Monitor Switzerland" is available online in German, French, Italian, and English in Publication Shop (Swiss Economy)