Outlook for Switzerland: Growth Supported by Strong EU and Weak Swiss Franc

The Swiss economy will continue to grow in 2018. The nation's economy will be supported by the strength of the euro zone and the weaker Swiss franc. In particular, exports from Switzerland will be the driver of growth. By contrast, real estate will become an increasing drain on the economy.

Thanks to a «super cycle» fueled by high immigration and a real estate boom, Switzerland sailed through the economic turmoil after 2007 more or less unscathed. Despite the much stronger CHF, the Swiss export champions, in particular the pharmaceuticals sector, contributed to robust growth. Yet both key growth drivers – immigration and the property cycle – are expected to lose momentum going forward.

Net immigration is already at the lowest level since the free movement of persons with the EU was introduced in 2007. This largely reflects the improved labor market situation in the European countries of origin, a trend that is likely to persist. Should the balance of immigration to Switzerland fall to its long-term average, GDP growth would be an estimated 0.1 to 0.2 percentage points lower than in the peak years.

Residential property to exert a drag

Weaker population growth, high household debt, tighter conditions on mortgages and the increasing oversupply of residential property are challenging the real estate sector. According to our estimates, between 5,000 and 6,000 excess apartments are currently constructed each year, accounting for a good 10% of new construction activity.

Removing that «excess» would lower GDP by around 0.5%, but given full order books, the construction sector should still support GDP growth in 2018. The normalization of construction activity and a correction of the oversupply will weigh on growth in subsequent years.


Long upward real estate cycle ending

Real GDP growth and growth contributions of construction in % YoY
Source: Swiss Ministry of Economic Affairs (SECO), Credit Suisse
Last data point: 2016

Export recovery a partial offset

The Swiss export champions are not immune to setbacks, as they are at risk of interventions by governments worried about rising healthcare costs. However, the overall export outlook is more favorable due to stronger growth and a weaker CHF.

Given reduced demand for safe haven currencies, the CHF should remain weak. However, even in the very open Swiss economy, exports constitute only about 40% of GDP. To achieve sustainable prosperity gains, stronger productivity growth is needed in domestic sectors that are still protected from competition and are thus less efficient.