- Modest pickup in activity since the start of the year driven by a resilient household sector, although the economy is set to remain below potential in 2024.
- Exports to pick up thanks to a recovery in external demand and the recent depreciation of the Swiss franc, with investment supported by further easing of monetary policy.
- The sharp easing in domestic and import prices to keep inflation within the central bank’s target over the forecast horizon, paving the way for further potential interest rate cuts.
Following growth of 0.7% in 2023, the Swiss economy picked up pace at the start of 2024, with GDP expanding by 0.5% in 2024 Q1. Services was the main driver of growth, consistent with a pickup in private consumption, a tight labor market and a gradual recovery in consumer confidence. Set against that, manufacturing output continued to contract, following a 2.3% fall in 2023. Although the services sector accounts for almost three-quarters of the Swiss economy, the country is a leading exporter of watches, while chemical products and machinery are also amongst its largest export goods.
Sluggish external demand, coupled with high borrowing costs globally, have been the main headwind to growth. This has hampered export volumes and extended a contraction in capital expenditure. The more recent evidence from the Purchasing Managers’ Index suggests a steady improvement in manufacturing since the start of the year, although the index remains below the threshold consistent with expansion in activity. Nonetheless, a sharp increase in delivery times could signal a pickup in capacity utilization and improved supply potential in the coming quarters.
Another inflection point relates to the exchange rate dynamics. The Swiss franc’s safe haven status led to a 20% appreciation (on a trade-weighted basis) between January 2020 and January 2024 (see Chart 1). While that has likely had an adverse impact on the country’s trade competitiveness, tourism inflows have returned to pre-pandemic levels, supporting activity in the hospitality sector. In addition, the Swiss franc depreciated by over 5% since the start of 2024, largely reflecting fluctuations in interest rate differentials with the U.S. This could support trade activity in the second half of the year.
The earlier strength of the Swiss franc has also reduced import prices and helped drive down domestic inflation (see Chart 2). CPI inflation has been within the 0-2% target since June 2023 (having peaked at 3.5% in mid-2022) and we expect it to average just above 1% both this year and next. Nominal pay growth is also at levels consistent with the inflation target, with firms reporting an easing in staff shortages and a fall in hiring intentions. Nonetheless, headline inflation could experience renewed volatility over the remainder of 2024 on the back of higher retail electricity prices, although we don’t expect the headline rate to spiral back above its targe
The Swiss National Bank (SNB) was one of the first major central bank to cut interest rates this year, lowering its key rate from 1.75% to 1.5%. The SNB put its decision down to the reduced inflationary pressure as well as the appreciation of the real exchange rate over 2023. The policy stance remains tight compared to the 2015-22 period when interest rates were negative, although it may not be far from its equilibrium level which keeps the demand and supply in balance. We expect further gradual policy easing this year as inflation stays within its target and economic activity remains below potential. While the hope is that easier financial conditions could spur a rise in investment activity, many firms are still holding off on future expansion plans waiting for the outlook to normalize.
Explore the national economic outlook for a selection of countries in Europe
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