NEWS Release - Switzerland: Staff Concluding Statement of the 2016 Article IV Mission - September 26, 2016
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Introduction
The Swiss economy weathered relatively well the sharp appreciation that followed the exit from the exchange rate floor . While GDP growth decelerated by half in 2015, flexibility by firms and the labor market helped to cushion the effect on output, which grew by a respectable 0.8 percent. The appreciation and fall in world oil prices lowered the Swiss-franc price of imports, boosting the purchasing power of Swiss consumers. In contrast, prices of domestic products, which more likely reflect Swiss cyclical conditions, declined only modestly. The improved terms of trade helped to widen the current account surplus.
Economic performance continued to firm during the first half of 2016 . Growth recovered further, supported by both domestic and external demand. Deflation continued to unwind as the effect of the early 2015 appreciation on price growth dissipated and the Swiss franc remained broadly stable against the euro. With real activity gradually strengthening and unemployment at low levels, the output gap continued to narrow.
Outlook and risks
Growth is expected to continue to recover this year and next, stabilizing at a moderate 1¾ percent over the medium term . GDP is expected to expand by 1.5 percent this year, with inflation reaching around zero percent by year end. The output gap is forecast to close gradually over time, returning inflation to the middle of the target band. However, inflation will remain below levels in key trading partners, facilitating a steady reduction of the real exchange rate, which we consider moderately overvalued. Net exports are likely to make a smaller contribution to growth than in the past owing to the weaker outlook for trade partners’ demand, leading to some narrowing of the current account surplus.
Risks to the outlook, while two sided, are tilted to the downside :
Improved effectiveness of unconventional monetary policies implemented by the major central banks should increase global demand and support Switzerland’s large export sector. However, this could be offset by a further decline in the trade content of global demand.
A resurgence of global financial market volatility could trigger further capital inflows into Switzerland that would appreciate the already overvalued franc and weaken GDP growth. These effects could spill over to the real estate market where house prices and household debt are elevated and banks are heavily exposed to mortgage lending.
Renewed concerns about the financial health of large foreign cross border banks could impact the large Swiss banks through counterparty risk and financial market contagion.
There could be negative impacts on Swiss-EU economic relations in the event that no mutually acceptable solution can be found in ongoing discussions regarding immigration.
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