Switzerland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Political, economic and social stability and consensus; role of direct democracy
- Close relations with the EU
- Limited sensitivity of exports to foreign exchange due to focus on high technology and quality
- Public accounts in surplus and large external asset position
- European crossroads with excellent communication network
- Small, open and landlocked economy
- Overvalued Swiss franc used as a safe haven
- Highly dependent on trading and financial services
- Elevated house prices
- Banks’ exposure to real estate (80% of loans), with two institutions accounting for half of domestic assets
- Population aging offset by immigration (foreign labor makes up 30% of the workforce)
Growth returns to normal
The exceptional performance in 2018 – which was largely due to the positive impact on foreign trade of the depreciation of the Swiss franc in 2017, and sports licensing revenues earned by FIFA in the lead-up to the World Cup – will not be repeated in 2019. In fact, growth is expected to revert to its usual low level, reflective of spare capacity, with external trade making a smaller contribution and domestic demand continuing to play a significant positive role. Accordingly, exports (66% of GDP) are expected to lose some of their vigor owing to a less favorable global economy and franc appreciation between May and the end of 2018. Conversely, imports (55%) will continue to be driven by brisk domestic demand. Export performances would be affected by a no-deal Brexit, since exports to the United Kingdom account for 6% of the total, excluding indirect exports via Germany. A soft patch for the euro that would give the Swiss franc back its traditional safe haven role would, provided it were temporary, probably be countered by an intervention by the Swiss National Bank, even if the central bank’s foreign currency assets already exceed GDP. Household consumption (54%), meanwhile, looks set to continue to benefit from the increase in disposable income in a context of low inflation and a labor shortage, which will encourage wage growth, given the very low level of unemployment and reduced immigration since 2018. Against the backdrop of intensive use of production capacity and continued favorable financial conditions in connection with the negative key rates applied by the central bank, business investment in equipment, commercial and industrial buildings, and research and development should remain firm. However, it could stall if negotiations with the EU to adopt a new framework agreement prove unsuccessful. Civil engineering financed by the federation, cantons and municipalities should remain on track, with, for example, the construction of the Ceneri railway tunnel to complement the Gotthard tunnel on the Zurich-Milan corridor. Investment in rental housing could nevertheless decline given the downturn in permits and the increase in vacancies observed at the end of 2018.
Chemicals, pharmaceuticals, industrial and medical equipment (mechanical engineering, precision instruments, electrical and electronic equipment), engineering and tourism are all expected to perform satisfactorily due to their ability to cope with less supportive external economic conditions. Forestry, wood processing, printing and agri-food are likely to have a tougher time. Watchmaking, which has just emerged from a challenging period, is likely to be hurt by the Chinese and American slowdown. Retail trade is expected to grow modestly due to weaker competition from foreign supermarkets in border areas. Accordingly, the rise in corporate insolvencies observed in 2018 should be attributed primarily to the increased number of business start-ups in previous years.
External accounts in surplus
Switzerland has a massive current account surplus, which comprises a surplus in goods (7.2% of GDP in 2017), as well as in services (2.8%), the latter mainly generated by finance, licences, patents and tolls. The whole exceeds transfers from foreign workers (4.5%), which have surged as the number of foreign cross-border workers has risen to over 300,000. Even when trade in commodities (4.1%) is taken out, the surplus is still 5.4%. In addition, recurrent surpluses have made it possible to accumulate significant foreign assets to the point that Switzerland had a net external asset position equivalent to 135% of GDP in June 2018.
Solid public accounts
Under the fiscal rule adopted in 2003 by the federation and replicated by most cantons, the public accounts must be structurally balanced (in 2018, they showed a surplus equivalent to 1% of GDP). If the economic situation deteriorates significantly, the federal and cantonal authorities, based on a vote by the representative assemblies, would have access to significant fiscal stimulus capacity. Public debt is divided equally between the federation, on the one hand, and the cantons and communes, on the other. Its cost is extremely low, with zero or negative yields on bond issues maturing in ten years or less (November 2018). Net of claims held by general government, the debt is almost zero. Fiscal policy, which is slightly restrictive, will remain uncontentious.
The FDP-Liberal Party, the centre-right Christian Democratic Party and the conservative and nationalist Swiss People’s Party (SVP) will dominate the bicameral Parliament and the National Council (seven-member executive with an annual rotating presidency) until the next elections in October 2019. Immigration from the EU (the SVP is pushing for a new vote), transformation of the many bilateral agreements governing relations with the EU into a framework agreement, pension reforms (increase in contributions and federal funding) and reforms to bring corporate taxation into line with international commitments (new vote planned for 2019) will remain the main issues.