Switzerland’s fiscal resilience offers opportunities for its economy – economy


The financial strength and resilience of the Swiss economy position it for a recovery in 2021. The pandemic crisis has created space for an expansionary fiscal policy. However, unlike what is happening with its neighbors, Switzerland’s economic recovery will be driven by businesses rather than by a government stimulus plan.

The Covid-19 is hitting the health system and the Swiss population hard. According to international data published on January 17, Switzerland has more cases per 100,000 inhabitants than Spain, France, Germany or Italy. The country imposed additional measures in mid-January, closing restaurants, sports facilities and non-essential stores until the end of February. For the moment, vaccinations are lagging behind the United Kingdom, Italy and Spain, with a rate of around 2% per 100 people on January 24, tied with Germany. Nonetheless, once the campaign is in full swing, vaccines should be quickly available thanks to the 15.8 million doses ordered from Moderna, Pfizer and AstraZeneca.

In addition to the health measures intended to contain the pandemic, Switzerland created a credit of CHF 28 billion over four years for research and education and launched a program to support exports and SMEs. Equivalent to 4.8% of gross domestic product, the Swiss pandemic stimulus plan has been modest compared to the massive amounts injected into the economies of France, Germany, the United Kingdom, Japan and the United States. The Swiss government budget has been in surplus for twelve of the fourteen years leading up to 2020. Last year, gross government debt increased by almost five percentage points relative to GDP, reaching 30.4%. An enviable debt burden, one of the lowest in developed nations.

“Economists are almost unanimous: a stimulus plan would not make sense at the moment,” said Guy Parmelin, President of the Confederation, in a recent interview. I think the best stimulus package is the one that allows people to work ”.

Switzerland has one of the lowest unemployment rates in the world. Undoubtedly cushioned by partial unemployment measures, this rate rose from 2.5% in February to 3.5% in December 2020. We expect it to drop back below 3% by the end of 2021. In most economies, such levels of unemployment would be considered full employment.

Switzerland should return to its pre-crisis production levels in the second half of 2021 with growth of 4.2%. Inflation, which fell to -0.7% in 2020 according to the Federal Statistical Office, is expected to rise to a still moderate level of 0.4% in 2021, which has not been observed since 2019. The key rate of the Swiss National Bank (SNB) is likely to remain unchanged at a record low of -0.75%.

Supported by the strength of the franc

The SNB’s mandate is to ensure price stability; among the instruments used, the value of the Swiss franc plays a decisive role. The safe haven status of the Swiss currency again came to the fore during the pandemic. While central banks defending their currencies against depreciation run the risk of running out of reserves, the SNB can, in theory at least, continue to sell francs to buy foreign currencies, because it has the means to do so. operate the printing press. Interventions in the foreign exchange market, said SNB President Thomas Jordan, are part of the central bank’s toolbox to ensure the stability of monetary policy, in particular to contain an overvalued currency and thus support exports.

On January 22, the franc hit its highest level in six years, at 0.88 francs against the US dollar. In 2020, the SNB recorded its largest interventions since 2012, when it maintained a floor rate against the euro. Based on sight deposit data, we estimate that the SNB spent CHF 119bn to weaken the currency, up from CHF 10.4bn in 2019. Much of last year’s interventions took place in during the first half of the year, when the pandemic gripped global economies.

An intervention that did not go unnoticed. At the beginning of December 2020, based on the current account, the trade surplus and the net purchases of currencies above 2% of the GDP, the US Treasury qualified the SNB as “currency manipulator”. However, it should be noted that the SNB has not intervened in the foreign exchange market in recent months against the backdrop of a recovery in international trade and economic activity.

Adding to the country’s financial strength, the SNB reported a profit of CHF 13bn on its foreign currency positions for 2020. In line with 2019, it will distribute a profit of CHF 4bn to the government and the cantons Swiss.

Defensive actions

With 60% of the Swiss Market Index (SMI) made up of defensive companies including manufacturers of consumer goods and pharmaceutical companies, the Swiss market is defensive by nature. As a result, the stock markets there resisted the pandemic crisis better. The SMI posted a 4.3% increase in 2020, while the SPI Extra posted a 12-month gain of 8.1%.

However, as investors turn to vaccines and markets focus on the recovery, this defensive bias offers fewer opportunities to capitalize on the cyclical rebound. In Swiss francs, the growth of Swiss equities is already lagging behind the rest of the world and the forecast price / earnings ratio is trading at a level of 19x.

Regarding profit growth, the consensus is for a 17% increase in the SMI this year and a further increase of 11% in 2022. However, this is only half of the forecasts for other European markets.

Nonetheless, market leaders who have created niche positions, including many small and mid caps, are expected to benefit from improving post-pandemic demand. In this context, we maintain a selective and neutral exposure to Swiss companies.

International competition

The Swiss financial sector, which represents one in ten jobs in the country, is facing a new challenge. Since January 1, Brexit has positioned the United Kingdom as a rival financial center. The two countries published in April 2020 a common position statement calling for a “further deepening of mutual market access”. Then, in June, the two governments signed a declaration of intent.

The two countries will have to negotiate access to the EU financial market with the European Commission. Therefore, the access of the Swiss financial center to the EU will depend in part on the relationship that the United Kingdom will eventually establish with the European bloc in the coming months or years.

By virtue of the more than 120 bilateral agreements signed during the last four decades, Switzerland already has some experience of the challenges posed by negotiations with the European Commission. In June 2019, the EU decided not to renew its stock exchange equivalency, thus preventing EU-based brokers from trading shares on Swiss markets and redirecting orders for European securities to European platforms.

A window of opportunity

Switzerland’s political infrastructure, which delegates many decisions to its 26 cantons, makes it a country ill-equipped to initiate a national economic boom equivalent to that which the United States is trying to provoke and which the European Union has approved. ‘last year. Historically, however, this political inertia has protected it from recessions.

Switzerland can now strengthen its economic power by encouraging its private and public sectors to join forces in the framework of public-private partnerships.

Short-term economic resilience should create a window of opportunity for investing in Switzerland’s future. The relatively low levels of public debt as well as the current account surplus, the return to economic growth and the low unemployment rate are all elements that pave the way for a sustainable recovery.

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