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The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of Switzerland 2006 published on 6 January 2006.
What are the key challenges?
Switzerland is still a prosperous country, but it is stuck in a low-growth trap and faces growing fiscal policy problems. While economic activity is affected to some extent by unfavourable conditions in Europe, low trend growth has structural roots. Indeed, growth of production and per capita income has been among the lowest in the OECD for many years, largely reflecting weak productivity gains. In the absence of a significant pick-up in productivity, trend output growth will decline further due to population ageing, inducing growing fiscal pressures. In this context, the authorities face two key policy challenges:
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Raising growth performance. The most immediate challenge is to nurture the recovery, following the recent weakening of activity. In the longer run, raising potential growth will require improving labour utilisation and, more importantly, boosting productivity through better functioning product markets and stronger competition in sheltered sectors. Maintaining a strong innovation performance will also be key for preserving high living standards.
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Restoring better control of public spending. The insufficient control over public spending since the early 1990s first triggered a sharp rise in public debt and was then followed by a marked increase in taxes and mandatory social security contributions which has helped to keep the deficit down to currently 1¼ per cent of GDP. Problems to be tackled with priority include a lack of efficiency in the health sector, insufficient control of social spending in disability insurance, and deficiencies in the medium to long-term fiscal framework.
Spending by all government levels has outpaced GDP
Source: Administration fédérale des finances, “Statistique financière révisée”.
How can macroeconomic policy strengthen the recovery?
The economy has been hit by a renewed cyclical weakening since the end of 2004 and is expected to expand by only 1¼ per cent in 2005. This is the third such episode in less than five years, even though this one has not turned into recession. A lull in exports, against a backdrop of rising oil prices, interrupted the economy’s fragile recovery, which had been driven by a resumption of exports and housing investment. While enjoying favourable competitiveness and profitability, along with a low cost of credit, businesses have remained cautious in hiring due to uncertainties about economic prospects. In this context, private consumption has expanded only moderately in 2004 and 2005. Employment growth has been modest, and the jobless rate has been steady at about 4% since 2003 – its highest level since 1997, although it remains low in international comparison. With tame wage developments reflecting a negative output gap of about 1%, inflation has remained very moderate despite sharply rising oil prices: it has hovered just above 1¼ per cent on an annualised basis between January and October 2005, whereas underlying inflation was only ¼ per cent in October 2005.
Given low inflation and sluggish activity, the Swiss National Bank (SNB) has pursued an expansionary monetary policy. The three-month LIBOR has been kept at 0.75% since the autumn of 2004 and has been negative in real terms for about three years. Lower inflation than in main trading partners and a stable exchange rate of the Swiss franc against the euro have implied currency stability in real terms, despite the fall of the dollar until the end of 2004. Benefiting from easy monetary conditions and some improvement in the external environment, the economy seems to be picking up in the second half of 2005, and GDP could increase by 1¾ per cent in 2006 and 2007, thereby exceeding the economy’s estimated growth potential of about 1¼ per cent. Unemployment should start to decline in 2006, without generating inflationary pressures, even if oil prices stay high. Nevertheless, heightening tensions in the oil market and another setback in the European recovery could delay the recovery once again and limit its strength. Keeping monetary policy easy is therefore necessary, until there are clear signs that a solid recovery is under way. Monetary conditions will eventually have to move towards a neutral stance. But the SNB, which enjoys substantial credibility that moderates inflation expectations, can afford to act very gradually.
The budget deficit of the general government, while moderate in international comparison, has widened since 2000 to 1¼ per cent of GDP in 2003 and 2004. As the deterioration is partly structural, particularly at the federal level, the authorities developed a medium-term consolidation strategy to eliminate the Confederation’s structural deficit, estimated at ¾ per cent of GDP in 2003, in accordance with the debt containment rule. This rule, which was supposed to apply as of 2003, is intended to keep the federal accounts permanently in structural balance. In view, however, of the impossibility of applying it to the letter without running the risk of penalising activity, the consolidation programme aimed first at stabilising the federal structural deficit and then at eliminating it progressively between 2005 and 2007, with the debt containment rule applying strictly thereafter. The initial implementation of this plan was broadly in line with expectations. A slight reduction of the structural deficit was even recorded in 2004 at the federal level, though the main impact of the federal plan was not expected to be felt before 2005. However, overall, the fiscal stance was roughly neutral in 2004 due to a slight structural deterioration in the social security accounts, and it is likely to have remained so in 2005. Beginning in 2006, it is due to turn slightly restrictive following the implementation of the federal consolidation programme
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Return to the Economic Survey of Switzerland 2006
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For further information please contact the Switzerland Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Claude Giorno and Florence Jaumotte under the supervision of Peter Jarrett.
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