Inflation. A Loyal Swiss Ally
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Inflation. A Loyal Swiss Ally

Switzerland has been classified as one of the happiest countries in the world. Commonly stated reasons for this are the sense of community, beautiful landscapes, fresh air, and clean water. Not to mention prosperity. 'Switzerland: A Financial Market History', by the Credit Suisse Research Institute in partnership with leading experts from the London Business School and Cambridge Judge Business School, investigates the sources of the country's economic success. The report highlights low inflation as one of the key success factors.

Urs Rohner, Chairman of the Board of Directors of Credit Suisse Group AG, on the strong Swiss franc, the Swiss financial center, and the implications of Brexit

Stable Means Successful

Markets like stability. No matter how tired this mantra may seem, it still holds true. They thrive in a stable and predictable environment, and are sent flying by one adverse event or the slightest sign of turmoil. Switzerland's case can serve as proof. According to the report, Switzerland was the fourth and the second least volatile equity and bond market, respectively. This stability has been reflected in the financial results. Over the 117-year period under review, equities achieved annualized real returns of 4.4 percent, which is above the European average. Meanwhile, the bond market proved to be one of the best performing in the world, with an annualized real return of 2.3 percent. Basically it means that an initial investment of CHF 1 made over a century ago, with dividends reinvested, would have grown in purchasing power by 159 times for equities, and 15.1 times for bonds. On top of that, the country had the world's lowest 117-year inflation rate of just 2.2 percent per annum.

Cumulative Returns on Swiss Asset Classes in Real Terms

Cumulative Returns on Swiss Asset Classes in Real Terms

Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research

A Fraction of a Percent Makes a Difference

To put this figure into context, below is the chart presenting inflation rates in other countries. Many of them experienced the rates skyrocketing during or in the immediate aftermath of the two World Wars. Therefore, in addition to showing inflation over the period from 1900 onward, the chart also shows it from 1950 onward.

As mentioned before, Switzerland's annualized inflation rate is 2.2 percent, and the runners-up – the US and the Netherlands – recorded a rate of 2.9 percent. This apparently small difference means that while in Switzerland prices rose 12-fold, the Americans and the Dutch had to face a 27- and 28-fold increase in prices, respectively.

It would be even more for the neighboring countries. France, Germany, Italy, and Austria all experienced high inflation periods. Germany had the highest inflation rate with prices rising 209 billion percent in 1923. For this reason, the hyperinflationary period of 1922 to 1923 is omitted from the long-term calculations (1900–2016). After Germany, Austria had the highest annualized inflation rate at 12.6 percent, with prices rising 1,082,325 times.

Inflation Rates around the World

Inflation Rates around the World

Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research

Low inflation together with Swiss neutrality, sound economic policy, and a strong currency have bolstered the country's reputation as a safe haven. A quality needed for the banking industry to thrive and grow. Today, Switzerland is one of the world's most important banking centers, and private banking has been a major Swiss competence for over 300 years.