Persevering in crisis. Five factors keep the Swiss economy strong.
Countries all around Switzerland are facing recession signals – yet Swiss companies are surprisingly positive about the new year and the development of the Swiss economy. Where does the confidence come from? Five factors that bolster the country's economy.
Comparatively good prospects for the Swiss economy
After years of overstimulation from COVID-19, the economy is normalizing here in Switzerland as well. Given the weak economy in our neighboring countries, slowing order growth is inevitable for manufacturing and the export industry. Compensatory spending in the service sector after COVID-19 appears to be gradually giving way to a new normal.
Yet despite global recession signals, the Swiss economy is likely to perform well both this year and in 2023. There are many reasons for this: Switzerland's strong purchasing power, falling inflation, the appreciation of Swiss real estate, a healthy level of immigration, and a balanced mix of sectors.
1. Consumers with purchasing power
Swiss private households still have large post-COVID-19 savings. This makes purchasing power strong. However, there are good reasons why Swiss citizens are still saving a great deal: First, those who save benefit from the end of negative interest rates. Second, the above-average level of prosperity in Switzerland results in structurally higher savings rates. Third, Swiss real interest rates are the highest in Europe.
On top of this, the most important reason for Switzerland’s impressive savings rate of 13% is likely to be salary growth in 2022. Over the first three quarters of last year, the total payroll rose by a total of 5% – thanks to the shortage of skilled workers and the traditionally good labor relations in Switzerland.
2. Low inflation and falling
There are good prospects that Switzerland's already low inflation rate will decline in 2023. Two main factors suggest this:
First, the Swiss economy is less than half as energy intensive as the rest of Europe on average. For comparison, the energy use required for CHF 1 million in value creation is roughly four times higher in Spain than in Switzerland. Second, normalization is helping supply chains. It shortens delivery times, reduces the costs of purchased goods, and thus lowers consumer prices as well.
On top of this, the strong Swiss franc makes Swiss imports cheaper. In addition, the Swiss National Bank (SNB) supports the Swiss franc's external value through foreign exchange sales. This incredible turnaround will allow the SNB to target a new normal for key interest rates of around 1% while simultaneously combating inflation primarily through foreign exchange market operations.
3. Persistent appreciation of Swiss real estate is driving the construction boom
The real estate market, which is particularly exposed to rising interest rates, is successfully grappling with the challenges presented by the economy. For residential property, price increases have likely exceeded their peak: An increase of more than 6% in 2022 is higher than average. At the same time, the vacancy rate remains below one percent, while immigration and space requirements continue to rise. This is also the leading to new records in the Swiss construction industry.
4. Immigration is alleviating the shortage of skilled labor
Switzerland is known to be a salary outlier, which fuels its immigration balance and captures the loyalty of cross-border commuters each year. This is a valuable asset from an economic perspective, despite occasional concerns about protecting local high wages in Switzerland or about a lack of integration. After all, it alleviates the skilled-worker shortage, makes it a stronger location for business, and lowers the cost that Switzerland has to pay for training.
In 2022, net immigration is expected to total around 75,000 people. Given record low unemployment and the 2.6% growth in employment, they will hardly threaten local jobs and instead fill vacant positions.
5. Favorable mix of sectors in Swiss economy
The fact that the Swiss economy has defensive qualities from an investor's perspective is due to the mix of sectors. Although the pharmaceutical industry – Switzerland’s most important export sector – grows only slowly, it is stable and rarely cyclical. By contrast, the machinery and capital goods industry – Switzerland's second-most important export sector – is feeling the international downturn in the economy the most. The third-largest export sector, the watch industry, has held up well so far and even experienced a resurgence in its Asian market in the last quarter.
The outlook for the Swiss tourism sector is also positive. Although group travel from China is missing, individual tourists with purchasing power are enjoying their vacations in the mountains, especially guests from the US.