Economic surveys and country surveillance

Economic survey of Switzerland 2007: Macroeconomic performance and main challenges


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The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of the United Kingdom survey of Switzerland published on 6 November 2007.



The major policy challenge is to turn the current economic upswing into a lasting pickup in potential growth

Switzerland has enjoyed a vigorous economic recovery since 2004. Growth has exceeded euro area outcomes for three consecutive years, after having lagged behind throughout the preceding decade. However, some of the factors fuelling the current upswing are likely to prove temporary. The significant contribution of the financial sector to the expansion has benefited from cyclical strength in global financial markets, which could be coming to an end, and manufacturing from a depreciating exchange rate and above-potential growth in important trading partners, especially Germany. On the other hand, immigration flows have increased, and they have the potential to make a longer-lasting positive contribution to aggregate supply.


Decomposition of GDP per capita in PPP terms
1. Based on current purchasing power parities and current prices.
2. Labour resource utilisation is measured as total number of hours worked divided by population.
3. Labour productivity is measured as GDP per hour worked.
Source: OECD, Annual National Accounts database and productivity database.


The level of economy-wide labour productivity is lower than in many other high-income OECD countries and has fallen further behind since the late 1990s, held back by weaker outcomes in sectors that are sheltered from international competition. In 2004, the government launched a “growth package”, including a series of measures aimed at boosting productivity. However, many of these measures are either not yet legislated or have only just taken effect. It intends to propose a further package of measures to parliament to strengthen potential growth in the next four years. While the general government balance has swung into surplus, spending on social entitlements is continuing to grow strongly. This may compromise the capacity of fiscal policy to support turning what is a substantial cyclical expansion into a lasting acceleration of potential output. The fundamental policy challenges are therefore as follows:

  • Improving the long-term sustainability of public finances and reducing tax distortions. Budgetary rules across all levels of government, as well as control of tax rates through the exercise of direct democracy and tax competition among sub-national levels of government, have helped exercise overall spending restraint. However, better control of social entitlement outlays would avoid disincentives for labour supply and free up resources for measures more conducive to growth. Tax reforms could provide stronger support to labour-force participation and entrepreneurship.
  • Raising the contribution of productivity improvements to potential economic growth. Switzerland continues to lag behind in a number of regulatory policy areas in which reforms favouring competition in product markets have had a marked impact on productivity performance across OECD countries. Implementation of the government’s earlier “growth package” needs to be completed rapidly and followed up by further measures, outlined below.
  • Removing remaining hurdles for immigrants and their offspring to realise their full potential in the labour market. Although immigration has become rich in skills in recent years, and integration efforts have been substantial, gaps between immigrants and the native population in labour-market performance as well as in educational outcomes are in some respects more significant than in other OECD countries. Scope remains to enhance the contribution of immigrants and their offspring to national prosperity.
  • Reforming the regulation of product markets and containing social spending were also identified as policy priorities in the OECD’s 2007 Going for Growth publication.


The recovery gained strength in 2006 and has consolidated in 2007

2006 marked the fourth year of the expansion, with real GDP growth reaching 3.2%, exceeding the potential rate by more than one percentage point. While significant inflationary pressures have not emerged, the output gap is likely to be closed. Spending has been led by external demand. More recently, consumption has also accelerated. Financial sector value-added has been especially buoyant, boosted by rising stock-market indices and unusually strong increases in stock-market turnover, while low interest rates have supported lending activity. Employment gains have been sizeable, as increasing immigration has contributed to a significant expansion of labour supply, although the unemployment rate (registered unemployment count) has also fallen to 2.6%. The rise in immigration partly reflects the agreement between Switzerland and the European Union on the free mobility of workers concluded in 1999. Coming into force in June 2002, it took full effect in June 2007, although transitional quotas continue to apply to Central and Eastern European EU member countries.


Economic growth in Switzerland and the euro area
Per cent
Source: OECD, Economic Outlook 82 database (forthcoming).


The outlook depends in part on exchange-rate developments

While economic growth is projected to decelerate somewhat, it is expected to remain above its potential rate, given the favourable conjuncture foreseen in European trading partner economies. At the same time inflation may edge up, in line with increasing demand pressures. Those pressures would be heightened if the Swiss franc continues its downward trend. In any case, there seems little reason to expect any significant decline in the long-standing but also surging current-account surplus, which has reached more than 15% of GDP. That surplus is attributable mainly to the huge balance on investment income, itself in large part a result of the important role of multinational enterprises in Switzerland, even if that role is exaggerated by international methodological conventions. In a more fundamental sense the rising surplus can be linked with a very high national saving rate – caused to some extent by the mandatory pension system – juxtaposed with a relatively low domestic investment rate, in part the consequence of already high capital intensity and modest total factor productivity growth. The continued weakness of the franc, despite the high and rising surplus, may be partly due to the “carry trade”, which may reverse at some point.


Monetary policy should leave sufficient room for expanding aggregate supply

In view of the surge in economic growth and the deterioration in the inflation outlook the Swiss National Bank (SNB) has withdrawn monetary policy stimulus, raising the target range for the 3 month Swiss Franc interbank interest rate by a cumulative 2 percentage points in the last two years, positioning it between 2.25 and 3.25%. At the same time, the SNB provided temporary additional short-term credit to banks in the aftermath of the turbulence in global financial markets in mid-August 2007, which had led to a significant increase in demand for liquidity. Further interest rate increases may be necessary should the expansion of output remain strong. The continued depreciation of the Swiss franc in 2006 and the first half of this year has contributed to more marked increases in import prices. Pass-through of such pressures to headline inflation may strengthen now that output slack has largely been eliminated in Switzerland as well as in Europe, and headline CPI inflation has risen slightly this year, to 0.7% in September. However, expanding labour supply has kept wage inflation low and some progress in opening up sheltered product markets to competition could in principle damp domestic price rises, offsetting rising import costs. Moreover, the impact of the global financial market turbulence on economic activity in Switzerland is as yet uncertain. Overall, these conditions warrant a slow paced and flexible approach to further tightening, in particular to allow the expansion of aggregate supply to be absorbed, even with the current robust activity.


The fiscal stance is appropriate for the economy’s cyclical position

The general government’s budget balance has improved from a deficit of around 1% of GDP in 2004 to an estimated surplus of about 1% in 2006, with a similarly-sized outcome expected for 2007, appropriately achieving consolidation at a time of high growth. The improvement reflects, in part, tighter spending control following the 2003 introduction of the “debt brake” rule, which requires the estimated cyclically adjusted federal budget to be balanced. Moreover, the recovery has impacted strongly on government revenues, reflecting the buoyancy of volatile profit and capital-income tax receipts, which yielded considerably more income than expected, in part reflecting booming financial-sector activity. However, spending on social programmes has continued to increase rapidly, notably in health care, disability insurance and social assistance, notwithstanding favourable labour-market developments.


How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Switzerland 2007 is available from:

Additional information                                                                                                  


For further information please contact the Switzerland Desk at the OECD Economics Department at  The OECD Secretariat's report was prepared by Andrés Fuentes, Claude Giorno and Eduardo Camero under the supervision of Peter Jarrett. Research assistance was provided by Françoise Correia.




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