IMF Executive Board Concludes 2019 Article IV Consultation with Switzerland
IMF News, June 27, 2019
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- Published: June 27, 2019
Economic performance and recent developments
- On June 17, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.
- The Swiss economy performed relatively well in recent years:
- GDP growth in early 2018 and through the year lifted growth to "2½ percent" in 2018.
- A slowdown in the second half of 2018 occurred on weaker global trade and one-off factors.
- Inflation and external balances:
- Inflation remained muted despite rising energy prices and a depreciation of the franc in mid-2018, due to subdued domestically-sourced inflation.
- The current account surplus rose to "10.2 percent of GDP" in 2018 on recovery in primary income.
Outlook and projections
- Short- and medium-term growth projections:
- Annual growth is expected to temporarily dip to "1.1 percent" in 2019 (carry over from 2018).
- Over the medium term, growth is projected to return to "1½ percent", with year-to-year fluctuations from the biennial cycle of international sporting events.
- Inflation projection:
- Over the medium term, inflation is expected to remain around the mid-point of the Swiss National Bank’s "0–2 percent" price stability objective.
- Current account:
- The current account surplus is expected to remain broadly unchanged from 2018 levels.
Risks to the outlook
- External downside risks:
- Weaker-than-expected foreign demand.
- Intensification of global trade tensions.
- Uncertainty over Brexit.
- Volatility in international financial markets that could reignite safe-haven pressures and impact profits of large globally-active banks.
- Domestic downside risks:
- Search for yield in a low-growth and low-inflation environment increases risks to financial stability.
- Any price correction in the real estate market could reverberate through the economy.
- Further delay in agreeing an institutional framework for Swiss-EU relations and remaining uncertainty regarding key parameters for corporate taxation and old-age pensions could reduce Switzerland’s appeal as an investment destination.
Policy assessment and Executive Board recommendations
- Monetary policy:
- Accommodative monetary policy (negative interest rate and willingness to purchase foreign currency) helped mitigate safe-haven pressures on the franc, averted deflation, and supported real activity.
- Directors concurred that the current accommodative monetary stance should be maintained.
- Many Directors noted limited room to further ease monetary policy if needed to secure price stability, and many considered a more prominent role for fiscal policy given substantial fiscal space.
- Directors agreed that any reduction in the policy interest rate would reinforce the need to tighten macroprudential policies.
- Foreign exchange intervention should be reserved for addressing large exchange market pressures, provided trend appreciation is allowed.
- Fiscal policy:
- Sustained structural fiscal surpluses, moderate-and-declining public debt, and negative borrowing costs have consistently overperformed the objective of the debt brake rule, creating an unwarranted drag on growth during periods of cyclical weakness.
- Directors welcomed the reduction in public debt achieved under the fiscal debt break rule and recommended moving to a balanced structural position in light of low public debt and favorable debt dynamics.
- Refinements to avoid underspending were recommended to allow room for addressing long-term challenges and compensating revenue shortfalls from corporate tax reform.
- A few Directors emphasized the primary purpose of the debt break rule is to avoid a deficit bias and ensure predictability of fiscal policy.
- Macroprudential and financial sector policy:
- No new macroprudential measures have been taken since 2014 despite risks in the real estate and mortgage markets from the long period of low interest rates.
- Directors endorsed FSAP findings and main recommendations and supported expanding the macroprudential toolkit to encompass additional mandated instruments, accompanied by a framework with enhanced expectations to act.
- Recommended strengthening governance, autonomy, and resources of the financial sector supervisor and allowing it to directly contract and pay for outsourced supervisory audits.
- Encouraged further reinforcement of the financial safety net and crisis management arrangements, including improving banks’ recovery and resolvability and establishing an effective public deposit insurance agency.
- To contain risks in the real estate sector, Directors called for new measures to restrain demand for high‑risk mortgages, tighter amortization requirements, and removal of tax incentives that encourage high household leverage.
- Structural and governance reforms:
- Directors recommended continuing to prepare for population aging, increased automation, and new work arrangements.
- They welcomed the recent approval of the referendum on corporate income taxation and pension systems and encouraged prompt implementation of these reforms.
- Encouraged maintaining high-quality education, investment in innovation, and reviewing social safety nets to ensure compatibility with new work arrangements.
- Governance, anti-corruption, and AML/CFT:
- Directors welcomed authorities’ actions to strengthen anti‑foreign bribery enforcement and looked forward to continued progress in enhancing the anti‑corruption and AML/CFT regimes.
Selected economic indicators
- Population (2017): "8.42 million"
- Quota (current; millions SDRs / % of total): "5,771.1 / 1.21%"
- Key export markets: Euro area ("44%"), US ("15%")
- Output
- Real GDP growth (%): 2017: "1.7", 2018: "2.5", 2019: "1.1", 2020 (Proj.): "1.6"
- Unemployment
- Unemployment (%): 2017: "3.2", 2018: "2.6", 2019: "2.8"
- Prices
- Inflation (period average, %): 2017: "0.5", 2018: "0.9", 2019: "0.4", 2020 (Proj.): "0.7"
- General government finances
- Revenue (% GDP): 2017: "34.2", 2018: "33.7", 2019: "33.6", 2020 (Proj.): "32.8"
- Expenditure (% GDP): 2017: "33.0", 2018: "32.4", 2019: "32.6"
- Fiscal balance (% GDP): 2017: "1.2", 2018: "1.3", 2019: "1.0"
- Public debt (% GDP): 2017: "42.7", 2018: "40.5", 2019: "38.7", 2020 (Proj.): "37.3"
- Monetary and credit
- Broad money (% change): 2017: "3.5", 2018: "3.1"
- Credit to the private sector (% change): 2017: "2.7", 2018: "4.0"
- 3-month Treasury bill interest rate (%): 2017: "-1.1", 2018: "-1.0"
- Balance of payments
- Current account (% GDP): 2017: "6.7", 2018: "10.2", 2019: "9.7", 2020 (Proj.): "9.8"
- Net FDI (% GDP): "2.9"
- Reserves (end-of-period, billions of US dollars): 2017: "762.2", 2018: "738.5"
- External debt (% GDP): 2017: "280.1", 2018: "265.0"
- Exchange rates
- REER (% change): 2017: "-4.3", 2018: "-3.9"
IMF Executive Board Concludes 2019 Article IV Consultation with Switzerland — Press Release No. 19/246 (June 27, 2019).
