KOF Economic Forecast, autumn 2024: Lack of recovery in Europe clouds prospects for the Swiss economy

The economic recovery in Switzerland is progressing more slowly than expected. The lack of stimulus from abroad in particular prevent the Swiss economy to fully utilise its production potential in the fore-cast period. The euro area is struggling to gain momentum. Above all, there are no signs of a significant economic recovery in Germany. In addition, momentum in the USA will slow in the near future. As a re-sult, the Swiss export industry is suffering, particularly the tech industry, while the pharmaceutical indus-try is one of the few positive exceptions. Swiss exports in total (goods and services) will virtually stag-nate until spring and only pick up speed after the first quarter of 2025.

The weakness in equipment investment remains pronounced. It is only towards the end of the year that they will develop a little more momentum. Bright spots in Switzerland are the solid development of the labour market and the easing of inflation. Private consumption continues to support the economic de-velopment and public consumer spending is also making a positive growth contribution this year. Public consumer spending will remain stable over the remainder of the forecast period.

GDP growth will be less dynamic in the years ahead

According to the KOF forecast, real Swiss GDP will increase by an annual average of 1.1% this year if major sporting events such as the European Championships in Germany and the Olympic Games in Paris are excluded (1.5% including sporting events). Next year, GDP growth will be 1.6% after adjusting for sporting events (1.2% including sporting events). In its current forecast, the KOF extends the forecast period to 2026 and assumes that GDP will increase by 1.7% (excluding sporting events; 2.1% including sport events) in 2026, a similar rate to the previous year.

Employment continues to grow – higher real wages allow scope for additional spending

Employment growth will continue at a solid pace not only in the short term, but also over the next two years. The KOF expects employment to increase by 1% in 2025. This growth is slightly below the medium-term average rate. For 2026, job growth is expected to be almost as high at 1.1%. The unemployment rate will tend to rise slightly but steadily over the forecast period. However, with rates of 2.7% and 2.8% (according to SECO) and 4.6% and 4.7% (according to ILO) in 2025 and 2026, unemployment will not rise at an above-average rate.

After two years of declines, real wages will rise again this and in the next two years, allowing scope for additional spending. These developments, the solid labour market and high population growth mean that private consumption will remain an important pillar of the Swiss economic development. Depending on how the 13th AHV¹ is financed, it could also provide a small boost to private consumption towards the end of the forecast period.

Inflation decreases below 1% – further interest rate cuts by the SNB expected

Inflation will continue to weaken in the forecast period, so that inflation is likely to be 1.2% this year and 0.7% in each of the next two years. While prices for goods and energy have fallen, price increases for services are above average. In view of the disinflationary trend, the Swiss National Bank (SNB) will lower its key interest rates further. The KOF anticipates an interest rate cut of 25 basis points in September and a further cut of the same magnitude in December, bringing the key interest rate down to 0.75%.

Significant forecast risks due to geopolitical conflicts – Swiss franc could appreciate

In view of the geopolitical tensions in various regions of the world, the risks to the forecast are currently considerable. The war in Ukraine, but especially the conflict in the Middle East, could have a strong impact on both economic development and inflation if it escalates further. The supply and prices of energy commodities could react strongly. The exchange rate of the Swiss franc is likely to react to a further escalation with an appreciation.

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¹ The initiative ‘For a better life in old age’ called for all pensioners to be entitled to a 13th AHV pension. The people and the cantons accepted the initiative on 3 March 2024. The changes will come into force in 2026. The financing of this initiative has not yet been decided.