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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Switzerland published on 15 January 2010.
The recession has been deep and triggered decisive monetary policy action
As in most OECD countries, the global financial and economic crisis has pushed the Swiss economy into a recession, reflecting its exposure to international trade and the relatively large weight of financial intermediation in economic activity. Switzerland has so far weathered the impact of the global crisis better than its main trading partners, owing to the sectoral specialisation of manufacturing with goods less sensitive to the business cycle, the moderate level of leverage of domestic borrowers in the private non-financial sector, resilient domestic credit and the absence of a housing cycle. Intervention from the government and the central bank to support UBS (the country’s largest bank) also helped contain the effects of the crisis. The exposure of the public sector to potential losses from the rescue package is moderate in international comparison, despite the very large size of the biggest banks relative to the economy. The Swiss National Bank (SNB) took decisive action to support liquidity in the interbank lending market, cutting interest rates on its repurchase operations to close to zero, contributing to reduce interbank spreads, intervening to halt the appreciation of the Swiss Franc and purchasing Swiss franc denominated bonds. Past prudent fiscal policy provided room to implement fiscal stimulus in 2009 and 2010 but the stimulus has been modest compared to other OECD countries, expected to reach about 0.6% of GDP in 2009 and 2010.
The contribution of financial sector value added to economic growth
Year on year growth rate and growth contributions, at constant prices
Source: OECD, Economic Outlook n° 86 database; State Secretariat for Economic Affairs (SECO).
The recovery seems underway but the withdrawal of the stimulus should be cautious
Swiss real GDP continued to decline in the second quarter albeit at a much reduced pace. Leading indicators suggest that a recovery is underway. According to the latest OECD projections, activity is expected to contract by 2% in 2009 and to resume growth at a rate of 1% in 2010 and 2% in 2011 with the unemployment rate rising to 5%. The timing of the exit strategy will be crucial for monetary and fiscal policy. Since the recovery is still fragile, the current expansionary monetary stance will need to be maintained until the recovery strengthens and deflationary pressures recede. However, monetary stimulus will need to be gradually withdrawn to ensure that price stability over the medium term is not threatened by the extra liquidity that has been created. Similarly, the fiscal stance should avoid becoming restrictive in 2010 as some cantons are likely to withdraw part of fiscal stimulus in 2010, owing to particularly stringent fiscal rules. Enhanced fiscal cooperation between the cantons and the federal government would make it easier to achieve the appropriate policy mix, both in the recovery phase of the current cycle and in the longer term, while ensuring the budgetary independence of cantons guaranteed by the constitution.
The crisis is likely to have a long-lasting impact on the economy
In the medium-term, the fall-out of the global financial crisis for Switzerland may be substantial. The current recession is likely to lead to an unprecedented rise in unemployment, and there is a risk that part of it becomes persistent. In view of the long duration of unemployment spells as well as the diminished procyclicality of immigration inflows, the effectiveness of placing activities of public employment services needs to be examined, as recommended in the previous Survey, including with respect to social assistance recipients. The government has presented draft legislation shortening the duration of unemployment benefit entitlement for some workers from 2011. Scope for expansion of financial services is likely to be diminished. However, the relatively benign credit supply conditions in the aftermath of the crisis suggest limited downward adjustment of potential output driven by a lower capital stock. Growth performance was strong in the years preceding the crisis, driven by external demand, and was accompanied by marked expansion of employment. The past weakness of trend productivity growth appears to continue. The economy-wide gap in productivity with respect to best-performing countries is substantial. To foster stronger and ensure sustainable growth, improvements in structural policies (e.g. financial sector regulation, product market and in education policies) are needed, which are outlined below.
Unemployment and short-time work¹
Quarterly data, not seasonally adjusted
1. In per cent of labour force.
2. 3rd quarter data for July only.
Source: OECD, Main Economic Indicators database and the State Secretariat for Economic Affairs (SECO).
Upon recovery, fiscal policy needs to address long term challenges
The impact of the global financial crisis on government finances is likely to be long-lasting, on account of deferred tax collection, the budgetary burden of higher unemployment, and the significant weight of tax revenues related to financial market activity. There is a significant risk that federal budget outcomes may breach the debt brake rule, which requires a balanced budget over the cycle, if corrective action is not taken. Areas of spending reductions need to be identified as soon as possible to abide by balanced budget rules at federal and sub-national levels in the medium term, for instance through reform of healthcare spending programmes, as recommended in the 2007 Economic Survey.
Furthermore, demographic change is projected to raise annual government spending by 5% of GDP by 2050 with unchanged entitlement programmes. The ageing burden will mainly fall on the federal level. The authorities are firmly committed to the debt brake rule which will reduce the public debt to GDP ratio ahead of demographic ageing. In addition, the government should implement reforms that help to offset part of the trend increase in ageing costs, in particular by a reform of the first pillar defined-benefits pension system.
Public finances remain subject to relatively small contingent liabilities, amounting to 6% of GDP, resulting from the exposure of the SNB to impaired assets transferred to a dedicated fund. However, the large size of several systemically important financial intermediaries’ balance sheets - 600% of GDP in the case of the two largest banks taken together - implies that a failure of one of them could potentially be very costly. There is some indication that capital markets have become sensitive about the link between default risk of financial intermediaries and risk premia on government debt. Steps to reduce the risk of failure of a large intermediary and moral hazard resulting from public support to failing intermediaries, as outlined below, are therefore crucial to avoid long-term risks to public finances and to keep borrowing costs low.
Credit Default Swap Prices for government and bank debt¹
1. All series start from January, 16th 2009, date from which data on Swiss government sovereign debt are available. Bank credit default swap prices for individual countries refer to the simple average with respect to their main banks.
Productivity performance remains considerably weaker than in best-performing OECD countries
While GDP per capita is among the highest in the OECD, sustained by high employment rates, aggregate productivity is still held back by low performance in sectors not exposed to international competition, keeping the overall price level of goods and services high. In particular, housing costs contribute to the high living costs. Reforms of product market regulation indicated in previous Economic Surveys need to be pursued further, notably by improving framework conditions in network industries, further opening government procurement to competition and further dismantling protection of domestic agriculture.
How to obtain this publication
The complete edition of the Economic Survey of Switzerland is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Switzerland Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat’s draft report was prepared by Andrés Fuentes, Charles Pigott and Eduardo Camero under the supervision of Pierre Beynet. Statistical assistance was provided by Patrizio Sicari. The survey also benefited from external consultancy work.