Swiss economy settles back in after the roller coaster ride

This year, the Swiss economy is expected to recover to a fairly large extent. After its roller coaster ride, it seems to be stabilizing to pre-crisis levels. Nonetheless, the loss of wealth due to the pandemic is anything but minor.

Economy on a roller-coaster ride

Switzerland's gross domestic product (GDP) dropped last year by 2.9% – similar to the financial crisis of 2009 (-2.1%). The economy has been on something of a roller coaster ride: The record low in Q2 2020 was followed by the fastest recovery in Q3, which lost momentum again in Q4.

Meanwhile, the economic forecasts of some institutions had their ups and downs. At first, the effects of COVID-19 on the Swiss economy were underestimated before being overestimated.

Record lows followed by rapid economic recovery

Forecasts for Swiss GDP growth in 2020 by time period
Sources: Consensus Economics, Credit Suisse

Economic fluctuations are losing momentum

Experts remain cautiously optimistic about this year. The GDP growth forecast remains at 3.5%. For a number of reasons, the effects of the coronavirus pandemic on the economy are much less severe than they were in the first wave. First, the measures taken to counter the spread of the virus in the second lockdown were less rigid this time but more targeted; this has helped lessen the yo-yo effect on private consumption. Second, the measures taken to protect public health and the economy were already familiar and in force. Furthermore, private households and companies have learned how to live and work with greater "coronavirus compliance."

Decline in mobility caused few problems for the Swiss economy

Thanks to these changes, mobility declined less than it did in the first lockdown, and activities were not affected to the same extent as the drop in mobility, according to the Purchasing Managers' Index (PMI) for the service sector. Furthermore, the global economy is faring much better than it was a year ago. In particular, many Asian countries, which account for some 30% of global demand, have largely overcome the pandemic and are on the path to economic recovery.

What's more, the end of the pandemic is in sight now that vaccinations are available. Seeing the light at the end of the tunnel is one reason why we will not see a massive wave of job cuts despite a sluggish economy. Companies are retaining employees as much as possible so that they can meet demand once the economy starts back up. Thus, unemployment is predicted to reach no more than 3.7%.

Decline in mobility caused fewer problems for the Swiss economy

Decrease in mobility as a percentage, compared with the pre-coronavirus base period (left-hand scale), PMI for the service sector (right-hand scale)
Sources: Google COVID-19 Community Mobility Report, IHS Markit, Credit Suisse

Companies make investments despite the pandemic

In addition, while some investments have been delayed here and there due to the second coronavirus wave, there is no capex freeze. In a January survey of purchasing managers for Swiss industrial companies, most stated that the second wave had little influence on their capex planning compared with the first.

One-fourth of respondents said they were investing less than originally planned due to COVID-19, while last June, 50% of the companies were putting their capex on hold. Furthermore, the investments placed on the back burner are expected to be made at a later time, similar to last year.

Swiss recovery not slated to recover in full

All in all, we can say that while economic output in Q1 2021 will drop slightly (forecast: - 0.5%), growth should pick up as summer approaches. However, there is no cause for extreme optimism. First of all, it will likely be some time before the pandemic has come to a complete end. Second, there is still a great deal of uncertainty about the progress in vaccinations and re-openings.

Finally, while GDP should get close to pre-crisis levels towards year-end, the loss of wealth due to the coronavirus pandemic will remain problematic. In all, GDP loss is estimated at some CHF 57 billion. The growth slump caused by COVID-19 will not be compensated for even by the end of 2022.

Severe loss of wealth, especially in the first wave 

Real GDP loss of wealth compared to scenario without the crisis, per quarter, in CHF bn
Source: Credit Suisse