Country Report Switzerland March 2009

Outlook for 2009-10

• The financial crisis and expected severe recession will dominate the forecast period. The government has stabilised the financial system for now, but its fiscal stimulus is 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 further deterioration in the international banking crisis.
• With the Swiss People's Party (SVP) back in government, 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 tackle the economic slowdown in 2009-10.
• Fiscal consolidation will be reversed in 2009-10, with the budget balance falling into deficit in 2009-10, as fiscal stabilisers come into play.
• With interest rates at 0.25%, the Swiss National Bank (the central bank) will continue to use unorthodox monetary policy measures to support prices.
• GDP is forecast to contract by 2.9% in 2009, with a further contraction of 0.3% in 2010. Unemployment is set to rise, and investment spending and net exports will be particularly weak. Industrial production will decline severely.

Monthly review

• The Swiss government has bowed to broad and sustained international pressure and offered to loosen the banking secrecy legislation that has been heavily criticised by a number of leading OECD countries.
• The government proposal will permit the authorities to exchange information on bank accounts with foreign states, if there is evidence of tax evasion.
• The weakening of banking secrecy provisions, which previously provided a competitive advantage to Swiss banks, has drawn consternation, but also a recognition that Switzerland had to act to prevent a stronger clampdown.
• The central bank is employing unconventional monetary policy tools to avoid deflation and to support the economy. It is buying up Swiss franc bonds and targeting longer maturities of other bonds.
• The central bank is also intervening in the foreign-exchange markets to weaken the Swiss currency, the strength of which had acted as a deflationary impulse.
• GDP fell by 0.3% quarter on quarter in the final quarter of 2008, confirming Switzerland's recession. In particular, exports and fixed investment were particularly weak, while private consumption was still positive.

Source: Country Report