Switzerland Needs New Growth Drivers
Thanks to an improved earnings situation, companies are likely to invest more again in 2018. But immigration and the real-estate boom – which have been key growth drivers until now – are losing momentum. Alongside its proven export champions, Switzerland needs an upsurge in productivity in its domestic economy if it is to achieve sustainable gains in prosperity over the next few years.
In the latest issue of "Monitor Switzerland," published today, the Credit Suisse economists examine the long-term growth prospects for Switzerland. They conclude that growth now needs to come increasingly from gains in productivity. "The dominant growth drivers of recent years – above-average immigration and a real estate boom fueled by extremely low interest rates – are losing momentum," says Oliver Adler, Chief Economist of Credit Suisse.
Net immigration has already reached its lowest level since the introduction of full free movement of persons in 2007. This declining trend in net immigration reflects the improved labor-market situation in European countries of origin, and is likely to continue in view of Europe's ongoing recovery. As a result of the weaker population growth, changing demographics, and increasing oversupply of residential property, the real estate sector is also likely to fade as a growth driver over the medium term.
Investment: Preservation of Capital Stock Absorbs Considerable Resources
Productivity increases require additional investment and/or increased efficiency. At first glance, Switzerland seems to be in a good position as far as investment activities are concerned. Almost a quarter of the country's economic output is used for investment – significantly more than in the likes of the UK (16.7 percent), US (19.6 percent), or Germany (20 percent). However, detailed analysis shows that a large portion of the total investment is spent on depreciation. The net investment ratio – that is, the investment ratio adjusted for depreciation – has gradually declined over the last couple of decades and currently stands at just 3.3 percent.
Thus the Swiss economy needs to invest significantly – or more specifically make major replacement investments – on a regular basis in order to preserve its capital stock. Indeed the major part of the investment planned within industry for next year is defined as replacement investment (43 percent), according to a survey conducted by Credit Suisse and procure.ch in August. On a more optimistic note, however, capital expenditure on research and development has been increasing markedly for years. That makes Switzerland a good location for future-led activities and knowledge-intensive professions.
Domestic Economy Has Growth Potential
The Credit Suisse economists also conclude that inefficiencies within parts of the Swiss economy as a whole are a greater obstacle to growth than inadequate investment activity. "The robust, immigration-driven growth of recent years has to some extent masked these inefficiencies," says Adler. In overall terms, an increasingly acute economic divergence can be seen between highly productive, internationally competitive companies and sectors (export champions such as the pharmaceutical industry and commodity trading) and a less productive domestic economy: Between 1997 and 2015 alone, labor productivity in the export economy grew by more than 40 percent on a price-adjusted basis; that compares with a virtual stagnation on the domestic side (around +5 percent). But alongside its proven export champions, Switzerland also needs stronger productivity growth in its domestic economy if it is to maintain a leading position in terms of economic growth over the next few years. As well as protected areas such as agriculture, government-related areas such as healthcare, social services and education, upstream sectors such as energy, but also the financial industry, should be able to make further efficiency gains.
Faltering Job Creation Likely to Dampen Consumption Growth Next Year
The Credit Suisse economists are cautiously optimistic about next year. Despite improved consumer sentiment, growth in consumer spending is likely to be on a par with previous years at 1.5 percent. Faltering jobs growth is the main factor militating against a more pronounced rise in consumer spending. First, companies are cautious about recruitment given the high level of salaries. Second, their main focus is likely to be on restoring their earnings position. "Since the end of the financial crisis, companies have taken a lot of the economic slowdown and Swiss franc appreciation onto their own books so that they didn't have to let staff go," says Adler. However, the expected pick-up in corporate profits as a percentage of gross domestic product – currently at a record low – is likely to result in only weak employment growth and minimal wage increases.
Stronger Growth in Exports and Investment Next Year
The improved earnings situation and a better global growth environment are nevertheless likely to impact positively on corporate investment. Nearly 40 percent of the companies in the above-mentioned survey said they intended to invest more next year. That is a considerably higher figure than the last two surveys, in 2013 and 2015, and more than twice as high as the number that intend to reduce investment (17 percent). Accordingly, the Credit Suisse economists expect the growth in capital spending on machinery and equipment to rise from 2.6 percent to 3.5 percent in 2018. Foreign trade also seems likely to gain momentum given the favorable situation for the export industry: The Credit Suisse export barometer, which charts the demand situation in Switzerland's key sales markets, reached an all-time high in August. Moreover, the Swiss franc's overvaluation against the euro has started to wane. Construction investment remains brisk for the time being, but is likely to peak soon in view of rising vacancies and capacity bottlenecks.