IMF Executive Board Concludes 2023 Article IV Consultation with Switzerland
IMF News, June 7, 2023
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- Published: June 7, 2023
Overview
- Growth slowed in 2022, while inflation became a new challenge after a decade of ultra-low or negative inflation.
- The labor market is tight, with the unemployment rate at a 20-year low.
- The external current account (CA) surplus rose further in 2022, thanks to strong merchanting trade and an improved services trade balance.
- Fiscal policy focus shifted from extraordinary, COVID-related support to offsetting extraordinary outlays, while addressing rising medium-term spending needs within the debt-brake rule.
- Monetary policy has tightened to reduce inflation.
- Challenges faced by Credit Suisse (CS) led to a state-facilitated acquisition by UBS in March to protect market confidence and financial stability.
- Financial sector buffers remain strong, but risks have increased.
- Pension reforms, dialogue with the EU, and green/sustainable transition progressed in 2022.
Economic outlook and projections
- Growth:
- Real GDP growth: 2020: -2.5; 2021: 4.2; 2022: 2.1; 2023: 0.8; 2024: 1.8
- Growth is expected to slow further in 2023—driven by the weak global outlook, tighter monetary policy, and cooling of pent-up demand—before recovering to medium-term potential in 2024.
- Inflation:
- Inflation (period average, %): 2020: -0.7; 2021: 0.6; 2022: 2.8; 2023: 2.5; 2024: 1.9
- Inflation is projected to remain above the SNB's 0–2 percent price stability range in 2023 at 2.5 percent, due to the tight labor market, wage pressures, and rent increases linked to higher mortgage rates.
- The SNB’s policy rate hikes and slowing activity should help lower inflation to 1.9 percent in 2024.
- Labor market:
- Unemployment (%): 2020: 3.2; 2021: 3.0; 2022: 2.2; 2023: 2.3; 2024: 2.4
- The small positive output gap that opened in 2022 is expected to close in 2023.
- External sector:
- Current account (% GDP): 2020: 0.4; 2021: 8.8; 2022: 10.1; 2023: 7.8; 2024: 8.0
- The CA surplus is expected to moderate to 7.8 percent of GDP in 2023, and remain near this level in the medium term.
- Fiscal outlook:
- Revenue (% GDP): 2020: 34.1; 2021: 34.8; 2022: 32.9; 2023: 32.5; 2024: 32.1
- Expenditure (% GDP): 2020: 37.1; 2021: 35.1; 2022: 32.0; 2023: 32.3; 2024: 31.9
- Fiscal balance (% GDP): 2020: -3.0; 2021: -0.3; 2022: 1.0; 2023: 0.1; 2024: 0.2
- Public debt (% GDP): 2020: 43.3; 2021: 41.7; 2022: 41.5; 2023: 39.9; 2024: 38.3
Risks and scenarios
- Risks are tilted to the downside, with high uncertainty.
- Noteworthy near-term scenarios:
- Scenario 1: An abrupt, synchronized global slowdown coinciding with prolonged high inflation in advanced economies, due to monetary policy miscalibration—could affect Switzerland via spillovers from the global outlook and lead to more persistent inflation.
- Scenario 2: An abrupt correction in housing prices or negative shifts in global financial markets, possibly involving renewed pressures on banks—could lead to financial sector stress and slowdown.
- Other concerns:
- Escalation of Russia’s war in Ukraine and other geopolitical risks.
- Further setback on EU relations could lead to substantial costs over time.
- Medium-term downside risks from delays in addressing climate challenges and geo-economic fragmentation, given Switzerland’s highly-open economy and important global financial and commodity trading sectors.
Executive Board assessment and recommendations
- The Executive Board commended the authorities for decisive actions to address financial stability concerns and potential spillovers from the Credit Suisse episode.
- Directors underscored the importance of continued prudent macroeconomic and financial policies given subdued and uncertain growth and elevated inflation.
- Fiscal policy:
- Agreed that the expansionary fiscal stance with a continued surplus is appropriate in the near term.
- Welcomed plans to offset past extraordinary spending and emphasized allowing automatic stabilizers to operate.
- Recommended targeted and time-bound support if downside risks materialize.
- Stressed addressing significant longer-term spending needs—for aging, climate, energy, and national security—within the ordinary budget and the fiscal balance rule.
- Noted that tax reforms should carefully balance public policy objectives with revenue considerations.
- Monetary policy and SNB:
- Welcomed the SNB’s data-driven monetary policy and encouraged continued tightening if second-round effects persist.
- Suggested the SNB continue to reduce FX holdings if facing depreciation pressures.
- Emphasized continued reviews of the SNB’s investment strategy and maintaining adequate safeguards given risks associated with its large balance sheet.
- Financial sector stability:
- Stressed need for close monitoring of the UBS-Credit Suisse merger and careful review and lessons learned.
- Highlighted monitoring vulnerabilities from non-bank financial institutions, real estate, and fintech sectors.
- Called for further efforts to implement recommendations from the 2019 FSAP, especially improving financial supervision and regulation, and continued strengthening of the AML/CFT framework.
- Structural and climate policies:
- Welcomed efforts to ensure energy security, reduce emissions, and improve disclosure of climate-related financial information.
- Noted that passage of the Third CO2 Act and the Climate Protection Act would be important milestones.
- Underscored importance of structural reforms and active labor market reforms to boost productivity and labor force participation.
- Stressed the need for further actions to strengthen pension sustainability.
- Encouraged continued dialogue with the EU regarding accession to the single market.
Key statistics and country specifics
- Population (2022): 8.74 million
- Quota (April 2023; millions SDRs / % of total): 5,771.1 / 1.21%
- Key export markets in 2022: Euro area (46%), US (18%)
- Selected indicators (additional):
- Broad money (% change): 2020: 6.5; 2021: 1.4; 2022: …
- Credit to the private sector (% change): 2020: 3.8; 2021: 2.6; 2022: 3-month Treasury bill interest rate (%): 2020: -0.8; 2021: 0.9
- Net FDI (% GDP): 2020: 18.2; 2021: 4.4; 2022: -2.3
- Reserves (end-of-period, billions of US dollars): 2020: 1084; 2021: 1110; 2022: 924
- External debt (% GDP): 2020: 288.2; 2021: 295.8; 2022: 275.3
- CPI-based REER (% change): 2020: 4.0
Press Release No. 23/200