Better economic situation thanks to lower inflationary pressures
The Swiss economy has been more resilient in 2023 and has a moderately better outlook for 2024 than its Western European neighbours. One big difference is that private consumption in Switzerland is relatively robust, supported by several factors. Due to the strong dependence on nuclear and renewables (especially hydropower), energy price pressures were lower than in many other Western European economies in recent years. Thanks to a strong Swiss Franc, imported inflation remained low. Accordingly, the Swiss inflation rate fell below the 2% target of the Swiss National Bank (SNB) in June 2023 and will likely remain there despite upward pressures coming from the property market. The mortgage reference interest rate (“hypothekarischer Referenzzinssatz”), given by the Swiss government to regulate the market and to guide banks, was raised from 1.25 to 1.5% in June 2023, but the full effect will only be felt over autumn 2023. Moreover, rents will increase further as landlords can transfer 40% of the inflation increase to their tenants. For 2024, the mortgage reference interest rate should remain unchanged. After increasing as much as inflation in 2023, wages are expected to outpace inflation in 2024, resulting in positive real wage growth. However, the main impact on private consumption comes from a sharp increase in the population, due to the highest level of immigration in the last 15 years. The University of Zürich estimates that the population has increased by 1.4% in 2023 and will further grow by 1.2% in 2024 (noticeably above the average of 0.8% in the last three years). As the labour market remains very tight, this will increase employment and bolster consumption in Switzerland.
The relatively low level of inflationary pressures led to a smaller increase of the policy rate by the SNB compared with other major central banks. Yet, given the still high level of inflation (by Swiss standards), the SNB should keep its policy rate unchanged - at its highest level since 2008 - until mid-2024 and then decide on the first single rate cuts in the second semester. The higher interest rates have a dampening effect on private investments. Nevertheless, they should still show some modest growth in the second half of 2023 and rise further in 2024. Although the manufacturing sector trembled somewhat in 2022 and the first half of 2023, the capacity utilization is relatively high, hinting at higher investments in equipment. More investments are expected too in the construction sector, as after a big push in investments in 2017, construction activity subsided in recent years. The vacancy rate eventually started to fall by mid-2023, and with an increasing population, construction investments should slightly increase in 2024. Finally, foreign trade should remain a positive driver for economic growth as many export products are in the luxury (watches) and high tech (pharma, medical, precision, etc.) segments, and therefore less dependent on the economic cycle.
Public accounts in good shape
After three years of deficits, the public accounts should have returned to a tiny surplus in 2023, as the debt brake (accounts must be balanced out via the complete economic cycle) came into effect again. While tax revenues should have increased noticeably and the expenses to integrate Ukrainian refugees are somewhat decreasing, the expenditure around the public transportation system and a subsidy for public employees to balance out inflation will limit the public budget surplus. In 2024, the measures to limit inflation’s impact on households should be lessened and likely lead to a larger surplus.
The country consistently posts a large current account surplus, thanks to the considerable goods surplus (in 2022: 15% of GDP). Despite finance and insurance, as well as sport licenses (e.g. the FIFA and IOC), playing an important role in the Swiss economy and external accounts, the services balance and the primary income balance (e.g. income from financial market operations abroad) are structurally in a small deficit. The structural deficit of the secondary income (transfer) balance adds to it, which is a result of foreign workers who work in Switzerland and send part of their income home. In 2022, a strong reduction in the trade in services deficit (maybe related to the UEFA world championship in Qatar in December) and an improvement in the goods trade surplus (related to the good terms of trade thanks to a strong Franc) led to a very high current account surplus. With the normalization of the services balance, the current account in 2023 should return to a level comparable with 2021 and should stay in this area in 2024.
Swiss assets abroad allow the country to have a substantial positive net foreign investment position (103% of GDP at the end of March 2023), the size of which varies with stock market prices and the USD/CHF exchange rate.
Stable domestic political situation, but hiccups in the foreign policy
Following the death in April 2021 of President Idriss Déby who was killed by rebel forces, his son Mahamat Déby took office with the consent of the African Union, given the urgent security situation, despite challenges to his legitimacy. In September 2022, the "transitional" President was given broad executive powers by a meeting of co-opted persons such as the new Prime Minister, Saleh Kebzabo. The transition, which can last up to two years (from September 2022) is still ongoing. While 2024 will probably see elections (presidential and legislative) resulting in a cabinet reshuffle, Mahamat Déby may stand as a candidate and retain the Presidency. While no elections have taken place in the country since 2015 (successive postponements owing to the security context and the subsequent death of Idriss Déby), the next elections will take place in a tense context. The army is omnipresent and the repression of opposition is severe (as was the case of the anti-government demonstrations on 20 October 2022, in response to the announcement of the extension of the transition and the eligibility of members of the transition for the next elections, which were violently repressed, resulting in more than 100 deaths and 300 injuries), in addition to the security threat from Sudan, which is high. The conflict in Sudan could also be a source of instability due to the large influx of Sudanese refugees via the introduction of a humanitarian corridor amid a state of food emergency that was declared in Chad in 2022 and a serious humanitarian crisis. Furthermore, although the junta intends not to take sides in the conflict affecting its neighbour, the geographical proximity of the two countries, as well as the proximity of their communities (the President's family is from the Zaghawa ethnic group, which is in the majority in Sudanese Darfur, one of the two main areas of fighting) and their history, has exacerbated fears of increased tensions within the country and a resurgence of the terrorist threat.
Le déficit du compte courant devrait se réduire en 2024, dans le sillage d’exportations dynamiques qui participeront à l’élargissement de l’excédent commercial. Cependant, il sera encore entretenu par une balance des services (principalement de transports) déficitaire (5 % du PIB), et le rapatriement de bénéfice des sociétés étrangères (principalement dans le secteur minier). L’instabilité politique et sécuritaire persistante continuera de limiter les entrées d’IDE et l’aide extérieure.