Switzerland Macro Outlook 2020
Swiss headline GDP has slowed dramatically, from an annual 2.8% in 2018 to an estimated 0.8% in 2019. But we expect the Swiss economy to grow by 1.3% in 2020 — although this acceleration in growth will be distorted by windfalls from major sporting events.
Swiss manufacturing has proved resilient in 2019 despite an unfavourable international environment— although with important differences from one industry to the other. Pharmaceuticals and chemicals, which account for 45% of total Swiss exports and which are relatively insensitive to exchange rate movements and economic developments abroad, have been among the most important contributor to GDP growth in 2019.
Even though some downside risks have abated, the international environment remains challenging for small open economies like Switzerland’s. The expectation that growth will remain weak in some key trading partners such as Germany and Italy will continue to weigh on Swiss exports. Firms are therefore likely to remain hesitant to invest in equipment, despite favourable financial conditions. Climbing vacancy rates could curb investment in construction. In these conditions, household spending is expected to remain an important pillar of growth in 2020, supported by a robust labour market and purchasing power gains due to subdued inflation.
The holding of the Summer Olympics in Tokyo and the UEFA European Championship will also help boost Swiss growth next year, given that big sporting organisations are headquartered in Switzerland.
Consumer price inflation should remain moderate in 2020. In the absence of any marked appreciation of the CHF, we forecast Swiss headline inflation to average 0.4% in 2019 and 0.6% in 2020, with risks tilted to the downside.
While eyes are increasingly turning towards fiscal policy as the main vehicle for sustaining growth and inflation as the effectiveness of monetary policy fades, Switzerland has been reluctant to use its considerable fiscal space. We believe the pain threshold that could trigger a large-scale fiscal stimulus has not been breached yet in Switzerland.
Since 2015, the SNB has kept unchanged its “two-pillar” strategy (negative interest rates plus a commitment to intervene in the FX market as needed). We expect it ) to maintain monetary policy loose, with the policy rate remaining at -0.75%. Any tangible evidence of persistent currency purchases by the SNB would increase the probability of a rate cut. Should the SNB lower its policy rate, it will likely come with an adjustment in the tiering system to lower the burden on banks.
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