Country Report Switzerland October 2009

Outlook for 2010-11

• The key political and economic issue in the forecast period will be the effect of the deep recession in 2009 and the emergence of the economy from the downturn. The political scene will nonetheless be relatively stable.
• Switzerland's large and economically strategic financial sector faces structural changes, and is expected to shrink in terms of size and contribution to growth.
• The return of the Swiss People's Party to government will be overshadowed by its under-representation compared with the party's parliamentary strength. The issue will not be resolved fully until the general election in October 2011.
• Financial services regulation is set to see significant changes, including a raising of capital ratio requirements. A Swiss bank, UBS, will remain a concern for regulators because of the size and quality of its balance sheet.
• The public finances are set to fall into deficit in 2009-11. The government is looking to restore the federal finances. Balancing the general government budget will also depend on the performance of the municipalities and cantons.
• The SNB (the central bank) will retain the option of unorthodox monetary policy measures to fight deflation, but should be able to roll back some of the measures during the forecast period, despite inflation remaining low.
• GDP is forecast to contract by 2.6% in 2009, with a return to growth of 0.7% in 2010. Unemployment is set to rise, and investment spending and exports will expand from weak levels in 2010-11.

Monthly review

• Voters approved a rise in the value-added tax rate of 0.4 percentage point to 8% from 2011, the proceeds of which will help to fix the invalidity insurance finances.
• Switzerland has secured its removal from the OECD's "grey list". By doing so, the OECD recognised Switzerland's progress towards renegotiating double-taxation agreements with other countries, to comply with OECD standards.
• At its September quarterly meeting, the SNB kept interest rates on hold and retained the option of deploying further unconventional monetary policy measures, but its stance seems to be shifting to neutral.
• The parliament has scaled back its planned (small) fiscal stimulus package for the first half of 2010, amid signs of gradually improving economic conditions. Some elements will not apply if unemployment does not reach 5%.
• Some tax measures, originally planned for the stimulus, have been put back to 2011, in an attempt not to worsen the public finances in 2010.
• Industrial production was down by about 14% year on year in the second quarter of 2009, but rebounded by 3.8% from the first quarter of the year.