After solid performance in 2022, Switzerland is facing a more challenging environment in 2023. GDP growth is expected to slow to 0.8 percent in 2023 (from 2.1 percent in 2022), partly reflecting weaker global growth; and inflation amounted to 2.9 percent in March, above the Swiss National Bank’s (SNB) 0-2 percent price stability range. Notably, the situation at Credit Suisse (CS), a global systemically important bank (G-SIB) that had experienced a series of risk management lapses and financial losses, deteriorated abruptly in March, leading to a state-facilitated acquisition by UBS, the other Swiss G-SIB, to preserve financial stability. The authorities are responding to these challenges with decisive actions. They provided emergency liquidity lines and guarantees to support the UBS-CS merger and address financial stability concerns. The SNB has raised its policy rate from -0.75 to 1.5 percent since June 2022 to reduce inflation. A general government fiscal surplus will continue, although likely lower than in 2022, in the absence of SNB profit transfers and with elevated outlays on energy security and refugees. Downside risks to growth and inflation outlook and financial stability are significant. Notwithstanding strong financial sector buffers, low public debt, and policy credibility, policies should aim to counter these risks. With elevated global financial stability concerns, it is important to continue to close data gaps to better monitor financial sector risks, enhance and expedite recovery and resolution planning, and implement other outstanding recommendations of the IMF’s 2019 Financial Sector Assessment Program (FSAP) to enhance resilience. Monetary policy should remain data dependent and continue to respond if second-round effects persist. Against the backdrop of its large balance sheet and the significant risks, the SNB should continue to regularly review its investment strategy and maintain adequate safeguards. Given significant medium-to-long term spending needs, fiscal strategies should be devised to address these within the debt-break rule. The authorities should pursue labor market and pension reforms, accelerate green transition, and continue their dialogue and engagement with the EU. They should continue to enhance cooperation with other countries and partners to strengthen resilience and lean against risks from potential geo-economic fragmentation
Outlook and Risks
1. Growth slowed from 4.2 percent in 2021 to 2.1 percent in 2022 with lower net exports, but stayed above medium-term potential as private consumption remained robust and industries affected by Covid-19 rebounded. The impact from Russia’s war in Ukraine was sizable, but in line with expectations. Inflation reached 2.9 percent in March, reflecting electricity price adjustments and broad-based inflation pressures. The 1.9 percent unemployment rate in February was a 20-year low. Better merchanting and services trade results led to a higher current account surplus in 2022 (10.1 percent of GDP) compared to 2021 (8.8 percent), broadly in line with medium-term fundamentals and desirable policies.
2. Growth is expected to slow further to 0.8 percent in 2023—driven by a weak global outlook, tighter monetary policy, and cooling of pent-up demand—before recovering to 1.8 percent in 2024, close to medium-term potential. Inflation is projected at 2.5 percent for 2023 and is expected to remain above the SNB’s 0–2 percent price stability range until 2024, reflecting tight labor markets, wage pressures, and rent increases linked to higher mortgage rates. As shocks dissipate, the SNB’s recent policy rate hikes and slowing activity should help bring inflation to the stability range (1.9 percent in 2024). The external current account surplus is expected to moderate to 7.8 percent of GDP in 2023 and to stay around this level in the medium term, as lower inflation and strength in key sectors preserve competitiveness. The small positive output gap that opened in 2022 is expected to close in 2023.
3. Risks are tilted to the downside. Two scenarios are worth considering: one driven by an abrupt global slowdown and prolonged high inflation, impacting Switzerland through lower exports and loss of purchasing power; and a second, in which financial sector stress intensifies, stemming from global financial markets (e.g., pressures on banks), or from an abrupt correction in housing prices. Escalation of the war in Ukraine is a significant concern, along with other geopolitical risks. Additionally, lack of clarity on EU relations could lead to substantial costs over time. In the medium term, increasing global debt and delays in addressing climate challenges are downside risks, along with geo-economic fragmentation, given Switzerland’s highly-open economy, important global financial and commodity trading sectors, and neutral orientation.
Fiscal Policy
4. After a larger-than expected surplus in 2022—due to strong labor markets and social-security collections—the overall balance is expected to moderate to 0.1 percent of GDP in 2023 with zero SNB profit transfers and elevated expenditures, particularly confederation outlays on refugees and energy and national security. The somewhat looser fiscal stance but continued surplus is appropriate, notwithstanding elevated inflation, given the key driver—lower SNB profits—as well as the temporary nature of the elevated expenditures and slowing growth. Guarantees provided in connection with the CS-UBS merger will only affect the fiscal position if called.
5. If downside risks to growth materialize, automatic stabilizers should be allowed to operate; targeted, timebound, and non-distortionary support to affected households and firms could be considered, if needed, with recourse to extraordinary provisions of the debt-brake rule. If downside risks to financial stability materialize, the low public debt level provides a buffer against risks stemming from contingent liabilities.
6. At end-2022, amortization needs stemming from Covid and other extraordinary expenditures were CHF 22.7 billion (3 percent of GDP), including 2022 outlays for refugees from Ukraine (CHF 0.7 billion). To avoid an excessively sharp adjustment, the authorities have appropriately extended the amortization period to 2035, with a possible extension to 2039.
7. The authorities need to address significant medium- and long-term spending needs—for aging, climate, energy and national security—within the ordinary budget and the fiscal-balance rule. Addressing these needs will require a clear medium-term plan on how space will be created to maintain structural balance. While planned spending adjustments will help eliminate structural deficits during 2024-26, further measures will likely be needed to account for these budget priorities. In this context, ongoing tax reforms—aiming at improving efficiency, removing distortions and introducing international initiatives—should preferably not lead to overall revenue losses.
Monetary Policy
8. The policy response of the SNB to the new inflation environment has been appropriate. The policy rate was raised from -0.75 percent in early 2022 to 1.50 percent at present, ending the long negative-policy-rate era. The SNB also adjusted the tiering of sight deposits to support interbank transactions and reduced liquidity through repo/bill issuance to ensure that money market rates remain close to the SNB policy rate. In recent quarters, the SNB also sold FX to contribute to the tightening of monetary policy.
9. Going forward, given upside risks to inflation, the SNB should proceed in a data-driven manner, continuing to tighten if second-round effects persist. Policy rates will remain a powerful tightening tool. If foreign-domestic interest rate differentials result in depreciation pressures, the SNB could continue to reduce FX holdings. In addition to containing inflation, this would help reduce the size of the SNB’s balance sheet and associated risks, contribute to liquidity absorption, and reduce interest expenses . By contrast, if safe-haven flows repeat, the SNB should refrain from using FX interventions (FXIs) to curb appreciation, unless necessitated by excess market volatility. Enhanced SNB communications—including more frequent publication of data on FXIs—would be useful in guiding the market and achieving policy objectives. In a downside scenario with more persistent inflation, the SNB should raise rates further to keep expectations anchored.
10. SNB losses in 2022 highlight the risks and communication challenges linked to its large balance sheet. Looking forward, while uncertainty on FX investment returns remain, higher interest rates on franc liabilities may lead to lower returns. Although risk of decapitalization is low and the SNB has taken measures to strengthen its balance sheet, continued review of investments and safeguards together with possible FX sales would help contain further losses.
Financial and Macroprudential Policies
11. While buffers remain, financial stability risks have risen amid rising interest rates and weaker global confidence. Banks and insurers have shown resilience in stress tests, and NPLs remain low. Non-bank financial institutions appear broadly sound, but in case of a spike of global financial turmoil, exposure to managed products and interlinkages could create risks. The fintech sector was not severely impacted by developments in 2022, but cyber risks remain high.
12. Real estate market imbalances remain elevated, although high prices can be partly explained by structural factors. The recent policy rate increase is expected to pass through to mortgage rates, helping cool the market. However, if vulnerabilities continue to build, the scope for further macroprudential measures may be limited as the countercyclical capital buffer (CCyB) on residential properties is already at the 2.5 percent maximum. In such a case, the authorities should consider activating the broad-based CCyB and urge banks to tighten prudential tools (e.g., raise LTV/DSTI requirements) within the self-regulation framework. To effectively address rising risks, the authorities should consider expanding the macroprudential toolkit with legally-mandated tools. Actions to address supply and affordability could include improving permit procedures, targeted subsidies for new construction, and new social housing projects.
13. In March, the authorities took decisive actions to address financial-stability concerns and potential spillovers arising from challenges faced by Credit Suisse. These challenges were the result of long-standing weakness, exacerbated in the end by conjunctural developments, including in the U.S. CS weaknesses included high-profile risk-management setbacks, financial losses, breaches of supervisory law, findings of material weaknesses in internal controls over financial reporting, and in the end, significant deposit outflows.
14. The state-facilitated acquisition of CS by UBS is expected to be concluded in the near term. This was the first intervention to address a G-SIB since the global financial crisis (GFC) in 2008—and therefore an important test of the too big to fail (TBTF) reforms developed over the past 15 years. The authorities considered the merger as a solution superior to employing the Swiss resolution regime or nationalization, given the uncertainty in the global banking sector. The merger was enabled by emergency legislation and involved the full write-down of CS Additional Tier 1 (AT1) securities and expedited approval of the transaction, including by CS and UBS. In addition to the SNB’s emergency liquidity assistance, the authorities announced that the merger will be supported by the provision of new sizable liquidity assistance loans from the SNB (secured by preferential rights in bankruptcy proceedings and partly by a federal default guarantee), and a CHF 9 billion second-loss guarantee from the government. In addition, FINMA will grant appropriate transitional periods to build-up the higher capital buffers that the larger bank requires.
15. We look forward to the conclusion of the transaction and the effective consolidation of the operations of both banks, including in light of risks to the public sector associated with the transaction. We also look forward to, in time, a careful review and analysis of the case and lessons learned—both for Switzerland and internationally. This could include the prolonged efforts of CS management to address long-standing risk-management failings, the Swiss supervisor’s related actions on the basis of existing enforcement provisions and potential resource needs, as well as more widely the TBTF reform agenda. We note that a planned review of the TBTF framework is expected over the coming year. The authorities will also need to closely monitor the implementation of the acquisition, including the impact on Swiss bank funding costs and creditor flows in the near term, and on the competitive provision of credit and other financial services to the Swiss market and sub-segments over the medium term. The consolidation will be complex and is expected to take time, with sizable job losses likely.
16. Safeguarding financial stability remains a top priority at the current juncture. If downside risks materialize, banks should be encouraged to use their buffers to absorb losses and also to maintain credit flow. Further efforts on closing the regulatory data gaps are warranted to better monitor risks related to NBFIs and the fintech sector. More broadly, while the authorities have continued to take measures in line with some of the recommendations of the IMF’s 2019 FSAP, further progress is needed to enhance financial resilience and put in place necessary instruments and resources to mitigate downside risks.
Energy, Climate Change, and Sustainable Finance
17. The authorities have taken preemptive measures to ensure energy security in the short term, while drafting legislation to ensure a low-carbon and secure energy system in the long term. The measures targeting possible gas shortages due to Russia’s war in Ukraine, as well as potential power generation shortfalls during winter peak hours, will be maintained for the next winter season, also reflected in the budget. But risks to energy security remain, stemming from potential escalation of the war in Ukraine, a dry summer season, a cold winter season, and possible technical problems with the French nuclear facilities. In the long term, the authorities are aiming to further expand the renewable energy capacity and strengthen energy efficiency and the security of electricity supply. They should ensure a timely development of the transmission grid to accommodate electricity produced by new renewables plants and provide clarity with regard to incentives and approval procedures for the deployment of renewable energy after 2025, when the incentives for alpine solar PV deployment are currently due to expire.
18. The authorities have proposed a revised CO2 Act for 2025–30 as well as a Climate Protection Act, providing the framework for emission reductions through 2050 and focusing on targeted support for green investments in the building and transport sectors. Achieving emission reductions in road transport, specifically passenger cars, is essential to meeting the 2030 emission reduction target and will require accelerated turnover of the vehicle fleet. The authorities are encouraged to closely monitor the pace of emissions reduction in the sector and consider introducing additional incentives (e.g., raised transport fuel duty) if necessary.
19. Switzerland views climate challenges not just as risks, but also opportunities, and aims to be a leading center for sustainable finance. The authorities have outlined action plans for 2022–25, focusing on ensuring sustainability data from all sectors, increasing transparency in the financial sector, encouraging impact investments and green bonds, supporting global carbon pricing initiatives, and preventing greenwashing. The recent publication of the Ordinance on Climate Disclosures will enhance the transparency and availability of data on transition and physical climate risks for large companies.
Labor Market and Pension Reforms
20. Easing the tight labor market will be key to keeping inflation in check and preventing labor shortages becoming a competitiveness bottleneck. While in the near-term cross-border workers and immigration are compensating for demographic challenges, the authorities should continue to promote broader/longer labor force participation, reduce early retirement incentives, remove disincentives for hiring/retaining older workers, improve childcare support, and ease tax disincentives for dual-earner families. Active labor market policies should target skill acquisition adapted to demand.
21. The Pillar 1 pension reform package passed in 2022 was an important step towards ensuring pension sustainability, but further actions will be needed. While the recently approved reforms are expected to ensure sufficient financing through 2030, long-term demographic pressures and the need to guard against future shocks call for additional measures. Plans to develop proposals by 2026 for further Pillar 1 reforms that target sustainability beyond 2030 are a step in the right direction. Pillar 2 reforms are also needed, and measures currently under consideration—including the lowering of the conversion rate, enrollment age and the contribution salary threshold—could help improve coverage and sustainability.
External Relations
22. Continued dialogue and engagement with the EU have yielded progress, including an agreement on the approach for future negotiations. These may lead to outcomes that give clarity on EU-Swiss relations and on Swiss access to the EU single market. The Swiss sanctions on Russia/Belarus are aligned with the EU, including with regard to sanctioned persons and entities. Switzerland remains committed to providing aid to Ukraine, including through refugee support, humanitarian assistance, and organizing and participating in international forums. In the face of geo-economic fragmentation risks, the Swiss authorities aim at strengthening resilience through diversification, various unilateral measures (e.g., removal of import duties on non-agricultural goods, maintaining strategic reserves), and enhanced collaboration with other countries/partners. Switzerland supports ambitious climate policy goals and is open to strengthen supply chains through cooperation.
