Country Report Switzerland February 2009

Summary

The financial crisis and expected severe recession will dominate the forecast period. The government has stabilised the financial system, but its fiscal stimulus is fairly modest compared with the magnitude of the slowdown.
Switzerland's outsized financial sector, in relation to the size of the economy, exposes the country to great risk in the event of a deterioration in the international banking crisis.
With the Swiss People's Party (SVP) back in government since December, the political scene should be calmer than in the past year, and this will be positive for the prospects of finding broad consensus for dealing with the recession.
Competition policy, social security reform, energy and EU relations are the government's main medium-term priorities, but action in these areas is likely to be delayed by the need to deal with the expected recession in 2009.
Fiscal consolidation will be halted by the expected recession, with the budget balance falling into deficit in 2009-10, as fiscal stabilisers come into play.
With interest rates at 0.5%, the Swiss National Bank (SNB, the central bank) is likely to be forced to use more unorthodox monetary policy measures.
GDP is forecast to contract by 2.5% in 2009, with a further contraction of 0.2% in 2010. Unemployment is set to rise, and investment spending and net exports will be particularly weak. Industrial production will decline severely.

The Swiss electorate has strongly backed the extension of the free movement of labour accord with the EU. Almost 60% of voters were in favour, which represents a solid endorsement of the government's European strategy.
Further EU issues are tax disputes and an upcoming referendum on biometric passports that is necessary for Switzerland's Schengen membership.
In view of the difficult recession, the government is contemplating delaying the upcoming increase in value-added tax (VAT), which was meant to finance social security deficits. Other sources of finance will be needed instead.
The large Swiss banks, UBS and Credit Suisse, have posted massive losses for 2008, and the outlook for a return to profitability is poor in the near term. UBS has settled a tax fraud case with the US authorities.
The purchasing managers' index for manufacturing fell to new lows in January 2009. Unemployment rose to 3% in December 2008 and slightly higher, to 3.3%, in January 2009, from a mid-2008 low of 2.3%.
Inflation fell to just 0.1% in January 2009, below the euro area's estimate of 1.1%, and a bout of deflation is on the cards now for 2009.

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52