Inflation and war in Ukraine: Swiss economy moves forward with handbrake on

Several factors are currently having a negative impact on the global economy. First, the sharp rise in energy and commodity prices is making production more expensive on a global scale. The war in Ukraine further accentuated this increase. This also applies, this is the second point, to supply difficulties. By 2021, the economy was already facing persistent supply difficulties. Instead of seeing the situation gradually normalize, problems are growing, mainly due to China’s zero covid strategy. Third, in many countries inflation is at levels not seen in decades. In the US and the EU in particular, widespread price increases are weighing on consumption, as households have fewer resources available in real terms. Finally, fourthly, uncertainties surrounding economic developments have increased further due to the war in Ukraine.

This cocktail is poison to the economy and contaminates the Swiss economy. The order books are certainly still full, but prices are also rising here, even if the increase is less marked than abroad. The problems encountered in value chains particularly affect the Swiss economy, which is highly interconnected, and prevents the fulfillment of an already strong demand. In addition, margins are shrinking due to rising input prices. Finally, the shortage of skilled labor prevents the exploitation of all opportunities. In short, we can say that the Swiss economy is moving forward with the handbrake on. And the situation is not going to change anytime soon. The prospects for the coming months are not very encouraging. It is to be expected that supply difficulties will persist, that commodity and energy prices will remain high and that inflation will also increase in Switzerland.

Glimpses of hope in some sectors

However, there are also glimmers of hope: in the absence of the negative factors, we would have seen an economic recovery after the pandemic. The high added value sectors, such as insurance, the machinery and electronic equipment industry and the pharmaceutical industry, continue to grow. The watch and medical device industries are also experiencing significant growth. Increases in input prices weigh more heavily on the chemical and textile industries. As for banks, they can certainly benefit, in part, from market volatility, but asset management activities also bear the costs.

As far as the national economy is concerned, international developments have an impact above all on the construction sector. In this area, price increases are sometimes massive and supply difficulties have a major impact on costs. Wholesale and retail trade is also put to the test, but supply difficulties here are mainly reflected in the unavailability of certain products and oblige consumers to opt for other products. The consulting and healthcare industries continue to grow. The return to normalcy at the end of the pandemic is also having a positive impact on the transport and tourism sectors. Energy suppliers, in turn, benefit from higher prices. But many industries are facing a shortage of skilled labor. During the Covid pandemic, many employees were reluctant to change roles. Given the very good prospects on the labor market, the number of job changes is again increasing significantly and jobs remain vacant for a longer time.

Shadow and light, therefore, alternate. Even within a given industry, the situation varies greatly from one company to another. Depending on the energy intensity of a sector, the configuration of value chains, the dependence on specific semi-finished products and the relationship with customers, the current crisis offers opportunities or brings risks.

The rate of inflation is increasingly felt in Switzerland as well

The strong Swiss franc, the high energy efficiency of the economy and the relatively low proportion of fossil fuels are factors that have mitigated the impact of price increases abroad on Swiss consumers. However, inflation is also making itself felt more and more in Switzerland. Import prices of raw materials, semi-finished products and finished products rose sharply. Many companies have no choice but to adjust their prices upwards in the coming weeks. Consequently, many consumer prices will also be high.

The monetary policy of the main central banks has been very expansive. The Fed, the US central bank, has decided on the first interest rate hikes and others will follow. Given the very high rate of inflation in the eurozone, the European Central Bank (ECB) will have no choice but to raise its interest rates. This should allow the Swiss National Bank (SNB) to eliminate negative interest rates. Long-term interest rates, which have already firmed considerably, will therefore continue to recover.

In 2022, inflation in Switzerland is expected to reach almost 3% a year on average. Also in 2023, a high inflation rate is expected for Switzerland.

Persistence of major economic risks

Economic risks remain considerable. As uncertainties about the course of the pandemic have eased, other downside risks have surfaced: more than a third of respondents to the economicsuisse survey conducted in May currently view inflation as the main economic risk. shortage of raw materials. Unsurprisingly, many companies fear a power shortage in the winter of 2022/23, which could have dramatic consequences for economic development. About 8% of companies surveyed expect an escalation of the war in Ukraine, with the downside risks that entails. Almost the same number of respondents pointed to the shortage of skilled labor as a problem for economic development. Interestingly, the development of exchange rates no longer attracts much attention: only about 3% consider the franc’s appreciation to be a major economic risk for Switzerland.

These results constitute a snapshot and show the great uncertainties of companies regarding the evolution of the economic situation. Potential damage varies. While certain risks, such as a shortage of skilled labor and supply difficulties, are slowing the economy, others could smother it completely: a power shortage next winter or an escalation of the war in Ukraine would have a major negative impact and recessive consequences for the Swiss economy. Current economic forecasts point to a downward trend, but without shocks.

Forecasts on the evolution of national accounts

Change in relation to the previous year (in %)

2019

2020

2021

32022P

2023P

Gross Domestic Product, real

1.2

-2.4

3.8

1.8

1.6

Household consumption

1.4

-3.7

2.6

2.5

1.5

government expenses

0.7

3.5

4.0

0.2

-1.7

Construction investments

-0.9

-0.4

1.3

-1.0

-2.0

capital expenditure

1.4

-2.5

4.7

-2.5

2.0

Exports (total)1

1.5

-5.6

11.8

4.7

4.0

Imports (total)1

2.3

-8.0

5.9

4.1

2.8

1Excluding non-monetary gold and valuables

Price and employment forecasts

Inflation rate

0.4

-0.7

0.5

2.9

2.5

Unemployment rate

2.3

3.1

3.0

2.2

2.3

Exogenous assumptions*

2022

2023

CHF/EUR exchange rate

1.02

0.98

CHF/USD exchange rate

0.93

0.90

Oil price in dollars

115

100

growth in the United States

2.5

1.9

Growth in the euro zone

1.8

1.5

growth in China

2.5

5.0

Short-term interest rate

-0.5

0.0

Yield on federal bonds

1.0

1.6

* Values ​​based on economic forecasts

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