IMF Wraps Up Consultation with Switzerland

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Switzerland.

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. The focus of fiscal policy has 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. Otherwise, financial sector buffers remain strong, but risks have increased. Pension reforms, dialogue with the EU, and green/sustainable transition progressed in 2022.

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. Although the UBS-CS merger may lead to job losses, the impact on growth is expected to be limited in the baseline, given the tight labor market. 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. The CA surplus is expected to moderate to 7.8 percent of GDP in 2023, and remain near 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.

Risks are tilted to the downside, with high uncertainty. Two near-term scenarios are noteworthy. First, an abrupt, synchronized global slowdown could take place at the same time as prolonged high inflation in advanced economies, due to monetary policy miscalibration. This could affect Switzerland via spillovers from the global outlook and lead to more persistent inflation. Second, 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. Escalation of Russia's war in Ukraine is also a concern, along with other geopolitical risks. Additionally, a further setback on EU relations could lead to substantial costs over time. In the medium term, 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.

Executive Board Assessment[2]

Executive commended the authorities for their decisive actions to address financial stability concerns and the potential spillovers from the Credit Suisse episode. Acknowledging the current challenges faced by Switzerland, including the subdued and uncertain growth outlook and elevated inflation, Directors underscored the importance of continued prudent macroeconomic and financial policies. Further progress on addressing medium- to long-term challenges will also be critical for boosting competitiveness and growth.

They agreed that the expansionary fiscal stance with a continued surplus is appropriate in the near term. They welcomed the authorities' plans to offset past extraordinary spending and emphasized the importance of allowing automatic stabilizers to operate. Targeted and time-bound support, if downside risks materialize, would also be useful. Directors also stressed the need to address significant longer-term spending needs—for aging, climate, energy, and national security—within the ordinary budget and the fiscal balance rule. They generally noted that the tax reforms underway should carefully balance public policy objectives with revenue considerations.

They welcomed the Swiss National Bank's (SNB) data-driven monetary policy and encouraged continued tightening if second-round effects persist. Noting the current inflationary situation and risks associated with its large balance sheet, they suggested that the SNB continue to reduce FX holdings if facing depreciation pressures. Directors emphasized the desirability of continued reviews by the SNB of its investment strategy and maintaining adequate safeguards.

They stressed the need for close monitoring of the UBS-Credit Suisse merger and carefully reviewing and drawing lessons from the case. They also highlighted the importance of closely monitoring potential vulnerabilities from non-bank financial institutions, and the real estate and fintech sectors. Further efforts to implement recommendations from the 2019 FSAP, especially in improving financial supervision and regulation, and continued strengthening of the AML/CFT framework will also be needed.

They welcomed the authorities' efforts to ensure energy security and reduce emissions, as well as their steps to improve disclosure of climate-related financial information. Passage of the Third CO2 Act and the Climate Protection Act would be important milestones. Directors also underscored the importance of structural reforms and active labor market reforms to boost productivity and labor force participation, and they stressed the need for further actions to strengthen pension sustainability. They also encouraged continued dialogue with the EU regarding accession to the single market.