Switzerland Country Risk Report Q4 2018
Swiss economic growth will slow over the medium term as high household leverage constraints consumer spending and a challenging global backdrop weighs on exports.
The government's robust fiscal position implies it will maintain its safe haven status and be able to step in and boost expenditures in the event that any external shock puts a sharp break on growth.
The Swiss National Bank will keep its policy rate on hold at -0.75% until 2019 when the ECB is also likely to begin raising its deposit rate, and will remain willing to intervene in FX markets in order to prevent excessive franc appreciation if the need arises. However, we forecast the franc to gradually depreciate over the long term from fundamentally overvalued levels at present.
Switzerland's current account surplus will remain among the largest globally as a percent of GDP, even as it narrows gradually over the coming years.
The Swiss government's decision to pass a law that gives Swiss citizens preferential access to job openings, a response to the 2014 referendum calling for im-migration quotas, will maintain the status quo in terms of bilateral treaties between Switzerland and the EU. However, a new cloud of uncertainty will hang over Switzerland's continued access to the EU's single market as the Swiss People's Party prepares to launch a new referendum targeting the freedom of movement, although there is a good chance that it will be rejected at the ballot box.
A rejection of the Swiss government's corporate tax reform in a February 2017 referendum raises headwinds to growth by creating a high degree of uncertainty for multinationals operating in the country. Tax reform will remain an imperative due to international pressure, and any future agreement will involve some trade-off between fiscal revenues and Switzerland's attractiveness as a hub for multinationals.
Although Switzerland's system of direct democracy keeps trust in the political system high, it also raises the potential that one day a directive passes which upsets the prevailing economic order.Major Forecast Changes
We now expect the franc to average CHF1.18/EUR in 2018, revised from CHF1.21/EUR, and CHF1.22/EUR in 2019, revised from CHF1.24/EUR.
There are significant risks facing global growth prospects stemming from Brexit, eurozone systemic risks, Donald Trump's protectionist policy proposals, the prospect of a Chinese hard landing, and waning confidence in the ability of central banks to boost growth. Switzerland, being a highly open economy, remains highly exposed to any further downturn in demand from developed and emerging market trading partners.
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