Restricted movement: Switzerland suffers economic downturn

Decreased mobility leads to historic economic downturn 

Switzerland saw an unprecedented economic downturn in the first half of 2020. On account of the COVID-19 pandemic, mobility and consumer spending in Switzerland took a nosedive. This article examines how Switzerland has fared compared to other countries and why it still has a long way to go to get back to normal. 

Historic economic downturn in Switzerland

In the second quarter of 2020, Switzerland's gross domestic product (GDP) shrank on an unprecedented scale. Compared to the first quarter, it lost an incredible 8.2% during the lockdown. That decline is more than four times as severe as the one experienced during the financial crisis of 2008/2009. Switzerland has not felt an economic slump of that magnitude since the State Secretariat for Economic Affairs (SECO) began keeping records of the nation's quarterly figures in 1980.

Limited mobility is the main reason for the economic downturn

The Stringency Index published by the University of Oxford measures government responses to contain coronavirus. Comparing the index to the change in GDP now shows that there is a high degree of correlation between the stringency of the measures taken and the trend in GDP. In particular, the reductions in mobility of consumers and workers were key factors in the drop in GDP during the second quarter. According to Credit Suisse estimates, consumers were able to obtain around one-third of goods and services during the lockdown only under more difficult conditions, if they were available at all.

Slump in GDP attributable to restrictions on movement

Restrictions have a direct impact on GDP 

University of Oxford Stringency Index and change in GDP
Sources: Datastream, Credit Suisse

Economic slump less severe in Switzerland than in other countries

Compared with European countries such as Italy, France, and the United Kingdom, Switzerland experienced a much weaker economic downturn. According to measurements by Apple, the decrease in mobility in Switzerland was comparable to the situation in Germany, but significantly lower than in Italy, Spain or France. First of all, that was due to the moderate extent of the lockdown. For example, there was no nationwide closure of construction sites or manufacturing businesses.

In addition, there was the noticeable effect of containing the virus and the rapid and efficient implementation of measures to cushion the negative blow of the pandemic. For instance, the short-time compensation for workers and COVID-19 loans showed significant results immediately after being announced. The domestic mix of sectors with a high level of value creation in the pharmaceutical, chemical, and other sectors that were not directly affected by the restrictions also proved beneficial to the Swiss economy.

Smaller downturn in Swiss GDP than in other countries

Swiss slump in GDP in international comparison 

Changes in real GDP versus previous quarter
Sources: Datastream, Credit Suisse

Mobility rapidly expanding again

With most of the COVID-19 restrictions being lifted and the risk of infection being perceived as low, movement in the country has returned to normal. Compared to its pre-crisis level, mobility has even increased. This increase is leading to an immediate recovery of the economy. The Swiss Purchasing Managers Index (PMI) for the service sector and its equivalent for the manufacturing industry have climbed back over their thresholds for growth. What's more, retail sales in July were nearly 10% higher than their pre-crisis level.

The Swiss are more mobile now than before the crisis

Swiss mobility rapidly increasing

Mean daily distance traveled, seven-day average
Sources: Intervista AG, Credit Suisse

Strong consumer spending because of accumulated savings

The massive savings of roughly CHF 8 billion that a large number of households accumulated during the lockdown are also contributing to the current boost in economic growth from consumer spending. It is expected that approximately two-thirds of those savings will be spent over the coming months. Falling prices and the desire to catch up on previously missed opportunities are also driving consumer spending.

Depressed labor market dragging down consumer spending

The consumer spending habits of the Swiss population are likely to lose steam in the near future, however. That is because the situation on the job market has a direct impact on personal consumption, and it is tense because of the pandemic.

Economic downturn is curbing investment. Export industry able to breathe a sigh of relief.

The investment climate is likely to remain subdued for a while yet in light of the difficult corporate earnings situation. However, demand for capital spending in machinery and equipment at least should pick up a little thanks to the recovery in industrial activity.

Cyclical sectors such as mechanical engineering, electronics and metals (MEM), along with watchmaking, are now climbing back up from their low point in exports. In international trade, however, the road to recovery will be especially long because shipping capacity and intercontinental mobility are likely to remain limited for some time to come.

Switzerland is recovering from the economic downturn, albeit slowly

The sectors that focus on domestic consumer spending are experiencing a pretty quick recovery following the historic slump in the first half of the year. However, the further economic recovery could progress rather sluggishly because of the effects of coronavirus on the labor market. The economy is not expected to recover strongly enough over the next year to allow the Swiss GDP to return to its pre-crisis level before the end of 2021.