Outlook of Switzerland

The Dutch Economy and the Brexit
2 de maio de 2017
Carta da Liga – 07/05/2017
8 de maio de 2017

Outlook of Switzerland

Facts and Sheet (Reference Year 2015)

Population: 8,1 Million
GDP per capita: 62’550 USD
GNI per capita: 63’982 USD
Real GDP growth: 0,8
Tax on personal income: 8,7% of GDP
Unemployment: 4,6% of labor force
Import of goods and services: 51,2% of GDP
Export of goods and services: 62,9% of GDP

Economic growth is rising but will remain moderate as the global outlook remains subdued. The labour market has been resilient, and the recent modest unemployment increase should be reversed by 2018. Interest rates are projected to remain low, helping to revive domestic demand. Deflation is ending as the currency has stabilized. The huge current account surplus
will persist. Monetary policy settings are appropriate, but risks from a long period of negative policy rates are rising. Although less buoyant than earlier, the housing market merits continued vigilance. Uncertainties remain regarding the implementation of the immigration quota decided in the 2014 referendum, even though some progress is being made. The ongoing reforms to corporate taxes are welcome. The fiscal position remains solid with the surplus expected to be maintained. The solid fiscal balance and the low government debt give significant room to boost high-quality spending, notably on public investment, which has been modest in recent years. Government bonds yields are negative up to 10-year maturities. Interest payments have been halved since 2005 to 0.6% of GDP. Projects that would raise productivity and green the economy should be prioritized. Expanding provisions for early childhood education and care would help ensure that growth is more inclusive.

Economic growth is recovering from the 2015 slowdown. The franc has enjoyed a period of relative stability since the sharp currency appreciation in January 2015. This has contributed to some rebound in exports, which have performed well, driven notably by chemical and pharmaceutical products. While domestic demand has been weak for the past two years, recent
indicators point to a recovery. Business confidence also points to higher growth. After a long period of deflation, consumer prices are now stable. The large current account surplus has shrunk somewhat but remains high, at above 9% of GDP.

demand, output and prices

Output growth is projected to recover and inflation will pick up Private consumption should gradually strengthen in 2017, as the unemployment rate returns to pre-2015 levels and household saving remains stable at ahigh level. Business investment will also contribute to boost growth, driven by better domestic and external prospects. The contribution from foreign trade will remain modest due to the strong franc, and the current account surplus will remain above 9% of GDP. Positive inflation is set to return as the economy gains momentum, but price rises will stay modest in the coming two years. An agreement with the European Union on the implementation of the referendum on migration quotas is still pending. This could potentially
disrupt trade flows with Switzerland’s main partner. Further weakness in Europe would also hurt the economy, both directly and through renewed pressure on the franc. A more pronounced rebound in global trade would be a boost.

Impacts of Brexit on Switzerland

Since the Brexit referendum on June 23rd, 2016, the island was keeping Europe busy for a long time, and its long-term consequences weren’t much foreseeable. Because of this event, Switzerland’s negotiating position with the EU was not expected to be improved by Brexit. Switzerland and Brussels were in negotiations about the future of the bilateral agreements. The relationship between Brussels and Switzerland was at stake, because of the mass immigration initiative from the Swiss People’s Party, tendency of a right-wing part. But the latest news are reporting, the negotiations between Brussels and Switzerland are reopened.

Brexit – or at least the stated intention of British voters to leave the EU – is a fact. However, since both the precise manner of departure and the drafting of the subsequent treaties between the United Kingdom and the EU are still entirely uncertain, it is still practically impossible to quantify the economic consequences with precision.

Nevertheless, Brexit is already influencing the real economy. First, the outcome of the vote had immediate implications for real economic indicators, such as the exchange rate. Furthermore, the real interest of Switzerland will be still hold below zero, meaning the interest rates will stay negative. Switzerland is expecting for a capital inflow and are trying to intervene as much as possible in the currency market to keep the Swiss currency low. In addition, Brexit had a dampening effect on the expectations of British consumers and producers. At the same time, the depreciation of the pound sterling should increase demand for British products, and cushion any adverse economic consequences for the United Kingdom. However, the more subdued expectations and the related increased uncertainty are expected to lead overall to restraint on the part of consumers and investors and offset any exchange rate gains.

Twin-track implications

The implications of Brexit for Switzerland are expected to be felt in two areas. First, the United Kingdom’s departure from the EU is expected to complicate trade with the island nation, at least until trade relations between Switzerland and the United Kingdom have been regulated in new treaties. This would affect predominantly businesses with direct trade relations. On the other hand, Brexit is expected to have indirect knock-on effects on Switzerland. It may be assumed that it will worsen Switzerland’s negotiating position with the EU with regard to the implementation of the initiative against mass immigration.

It is difficult to imagine that, in view of the expected tough negotiations with the outgoing United Kingdom, the EU would grant concessions to a third country in relation to one of its core basic values, free movement of persons. The requirements of the initiative against mass immigration are not compatible with the agreement on the free movement of persons between
Switzerland and the EU, and the implementation of the initiative would constitute a violation of the treaty by Switzerland. Brexit has probably made it more likely that the EU would respond to a violation of the agreement on the free movement of persons by terminating the agreement. Since the agreement on the free movement of persons is associated by a guillotine clause with the further Bilateral II Agreements, this means that if one treaty is terminated then all Bilateral II treaties will lapse.

Switzerland, an attractive pole for Startups

On March 29th 2017, the Federal Council in Bern focused on the young startups with an interesting growth in Switzerland. Even if those young startups are doing rather well, the federal council noticed there were some gaps in the process of starting a company.

Indeed looking at statistics addressing the share of venture capital in the GDP, Switzerland comes up second behind Finland (2015) on an European scale. It amounted to 0.044% but compared to the international scale, Switzerland is far behind countries, like Israel (0,383%) or the United-States (0,284%).

To respond to this need, and fulfill the gap, an author of the first Federal Council report on research and innovation thinks that a « fund for the future » is a rather good option. The SCH (Société suisse de Crédit Hôtelier) or the technological funds facilitate on a federal scale the aid in securing investments (equity or loan).

But what the author meant is to develop a public VC program even if offers are made by private institutions or public institutions. It would increase the number of Startups, knowing that the country is willing to support the development of these companies. Another interesting fact is, if we used public institutions to promote young startups, it could be rather interesting for habitants to invest, and use their savings to promote those young companies and earn money out of this investment.

Unfortunately, at this time, the Federal Council does not think necessary to develop a program of public financing to support young Startups. Private and public institutions offer a comfortable resource for investment.

The economic frame offered by Switzerland is globally one of the best in the world. One of the objectives consists in adapting constantly to the dynamism of the economy and the technological evolution.

For future notice, the federal Council will examine other measures of improvement so that Switzerland can protect her attraction for companies with fast growth.

Bibliography:

http://www.oecd.org/eco/outlook/economic-forecast-summary-switzerland-oecd-economic-outlook-november-2016.pdf

https://www.kof.ethz.ch/en/news-and-events/news/kof-bulletin/kof-bulletin/2016/09/no-consequences-of-brexit-for-switzerland-yet.html

Source: SECO www.admin.ch

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