A strong economic model but concern from CHF appreciation

Country Rating AA1


  • Sound political institutions
  • Specialized in manufacturing of high-quality goods with, however, a relatively inelastic demand during economic crises
  • Large current account surpluses
  • Very good public finances with fiscal surpluses and low public debt


  • International pressures on bank secrecy, populist votes on immigration and an ageing population could affect the currently strong business environment in the medium term
  • The banking asset to GDP ratio is amongst the largest in the world at 450% in 2013.


Economic Overview


Strong macroeconomic fundamentals

Switzerland is a high income economy with estimated GNI per capita of USD84,720 in 2015. Macroeconomic fundamentals are very strong, reflected in many years of large current account surpluses and near-balanced fiscal accounts. Public debt is moderate at about 35% of GDP (see Figure 1). If needed, the economy has sufficient buffers to withstand the impact of domestic or external shocks for some time. 


Gradual recovery to continue 

Real GDP growth weakened somewhat towards the end of 2016, posting +0.1% q/q in Q4 (unchanged from Q3) and +0.6% y/y (+1.4% in Q3). Still, this took full-year 2016 growth to +1.3%, indicating that the impact of the shock from the strong CHF appreciation after the removal of the CHF:EUR cap in January 2015, which cut growth to just +0.8% in 2015, is gradually waning. This is also reflected in external trade figures which show that real exports grew by +4.6% in 2016 (up from +2.2% in 2015). Imports expanded by +2.7% (+4.3% in 2015) so that net exports made a positive contribution of +1.6pp to 2016 growth (-0.9pp in 2015). However, this was offset by strong inventory destocking which subtracted -1.8pp from growth (+0.5pp in 2015). Meanwhile, fixed investment accelerated to +2.5% in 2016 (+1.5% in 2015) while private and government consumption continued to increase at a solid pace, by +1.2% and +1.9% (+1% and +2.2% in 2015) respectively. 

Euler Hermes expects the recovery to continue and forecasts full-year GDP to rise by +1.6% in 2017 and +1.7% in 2018. Growth in the next two years  is projected to be more balanced between domestic and external demand than in 2015-2016.


Exchange rate of CHF has found a new equilibrium against the EUR

The year 2015 was affected by global currency turbulences and, in particular for Swiss companies, the decision of the Swiss National Bank (SNB) to end the exchange rate cap of CHF1.20/EUR in January 2015. Consequently, Swiss total exports of goods (excluding non-monetary gold and valuables) decreased by 
–CHF5.4bn in 2015 (exports to the Eurozone 
–CHF6.4bn). However, the CHF/EUR rate stabilized around an average 1.09 in 2016 (slightly weaker than the average 1.07 in 2015) with low volatility (see Figure 2). As a result, exports rebounded and gained +CHF7.8bn last year (Eurozone +CHF4.6bn). Euler Hermes expects the exchange rate to remain relatively stable around an average CHF1.07  per EUR in 2017. 

Deflation, which was exacerbated by the CHF appreciation in 2015-2016, has finally also given way to positive inflation. Consumer prices increased by +0.3% y/y in January 2017 and +0.6% in February. Euler Hermes forecasts average annual inflation of  +0.9% in 2017 and +1.3% in 2018.

Economic Overview

Growth likely to dip below long run average

Real GDP growth accelerated to +2.0% in 2014 after +1.9% in 2013. Private and public consumption contributed +0.5pps and +0.1pps to 2014 growth, respectively. External trade activity declined significantly with exports declining -7.1%. As imports decreased even more (-9.4%) net exports thus contributed +0.5pps to GDP growth. Inventories contributed +0.4pps to annual growth. Going forward, growth should decelerate to +1.0% in 2015 as net exports are likely to be a drag on GDP growth with investment soft. 2015-16 are likely to be around half the long run growth average of 1.9%.
The end to the exchange rate cap comes with costs for the real economy
The SNB announced on January 15th an end to the exchange rate cap of CHF1.20/EUR introduced in late-2011, cut simultaneously the interests rate on sight accounts by 50bp to -0.75% and decreased the policy target range to -1.25% - -0.25%. The CHF appreciated immediately by 19% and levelled in the meantime around CHF1.07/EUR (11% below the FX cap). The move by the SNB will impact in particular the export sector and the domestic economy will feel the knock on negative impact. 

Private consumption is key growth driver

Private consumption has been the main growth driver in the past years, supported by low unemployment, robust wage increases and a wealth effect coming from rising house prices. Switzerland’s deflation experience over the past years has neither hurt consumption nor economic growth but rather bolstered real wage growth. Lower import and oil prices, coupled with negative interest rates, should bolster consumption as the key driver of 2015’s GDP growth.

Downside risk for exporters though high current account surplus remains

Swiss trade statistics are highly dependent on gold trade as Switzerland plays a key role in the international gold market. Gold is usually imported from the UK (60% of Swiss gold imports), melted down and recast into smaller bars in Switzerland before being exported to Asian economies, mainly to Hong Kong (44%) and India (14%). In 2014, total exports in real terms decreased by -7.1% and imports by -9.4%. but when excluding non-monetary gold, real exports actually increased by +4.7% and imports by +0.4% Non-gold exports are traditionally high value-added and luxury goods, enjoying a relatively inelastic demand, including pharmaceuticals, mechanical engineering and the clock making industry.
The end of the FX cap will bring downside risks for exports to the Eurozone (60% of exports). However, exports to non-Eurozone destinations should be less affected as the CHF depreciated significantly over the prior 6 months to the SNB decision. Accordingly, the USD/CHF exchange rate is now close to its summer 2014 level and is forecasted to converge to 1.06 by Q4/2015. Exports should benefit from the moderate recovery of world trade and should offset much of the negative FX effects in the Eurozone. Euler Hermes expects stagnating exports in 2015.
Switzerland's current account balance has recorded some of the highest surpluses in Europe over the past decade (along with Norway). In line with decreasing exports, the current account surplus narrowed to +7.1% of GDP in 2014. It should rebound to around +11.7% and +11.1% in 2015 and 2016 respectively.

The strong Swiss franc continues to feed deflationary pressures

Despite the negative policy rate, the strength of the franc continues to feed deflationary pressures. Inflation averaged -0.2% in 2013, and -0.1% in 2014. Under the influence of lower oil and import prices, inflation fell by -0.5% in January 2015. Euler Hermes forecasts a deflation in 2015 of -0.9%. The price level’s decline should slowly ebb over the course of the year but deflationary pressures could continue into 2016.

Public finances are sound

Since 2006, government revenues have been higher than government expenditures, leading to small budget surpluses (except for a tiny deficit in 2012). In 2015-2016, annual surpluses of +0.3% and +0.1% of GDP are projected respectively.
Public debt is low and decreasing. It accounted for 33.5% of GDP in 2014 and is expected to lower to 32.3% of GDP in 2015 and 30.9% in 2016.

Companies enjoy a favorable environment

Switzerland is a business-friendly country, ranked 20th out of 189 economies in the World Bank's Doing Business 2015 survey. The number of corporate insolvencies edged up to 4570 cases in 2013 (+1%) but decreased to 4240 cases in 2014 (-7%). In 2015, Euler Hermes expects again an increase in insolvencies to 4450 cases in 2015 (+5%).
A key driver of the deterioration is the recent decision by the SNB to end the EURCHF floor, which will hinder competitiveness and will force many companies to cost cuts, driving some companies out of the market. Not only export orientated firms but likewise suppliers and consumer-orientated industries should be affected.
Moreover, the Swiss economic model has been challenged in the past months. Recent international initiatives to address tax evasion and money laundering are eroding bank secrecy and the tax treatment of corporate income on foreign activities is also coming under international scrutiny. In the 2000s, immigration has been an important contributing factor to rapid economic growth but a recent popular vote limiting immigration may inhibit corporations’ ability to employ highly skilled employees.
Last review: 3/19/2015