Subdued European economy weighing on Swiss prospects

The already weak international economy deteriorated further in the fourth quarter. KOF has revised the outlook in its forecast downwards – especially in the European markets that are important for Switzerland. This weak demand is likely to continue until the middle of next year, when the economic situation should improve slightly. While domestically focused sectors are performing fairly well thanks to buoyant consumption, the export-driven part of the Swiss economy is being hit by subdued international demand and the strong franc.

Sluggish GDP growth this year and next

KOF is forecasting Swiss GDP growth of 0.9 per cent excluding major international sporting events this year (1.3 per cent including these events), which represents a downward revision of 0.2 percentage points compared with the autumn forecast. For 2025, real sport-adjusted GDP growth is expected to be 0.2 percentage points lower at 1.4 per cent (1 per cent non-adjusted), while the forecast for 2026 remains unchanged at 1.7 per cent (2.1 per cent non-adjusted).

Pharmaceutical industry remains growth driver in Switzerland; investment in equipment falls again

The sectors most affected by the current economic weakness are industry-related services and manufacturing. The exception here is the pharmaceutical industry, which continues to grow at an above-average rate and is the biggest growth driver for the Swiss economy. This weak economic activity is also reflected in companies’ low planned investment. Contrary to KOF’s expectations, investment in equipment fell again in the third quarter of 2024. This is a broad-based decline across all categories, which is consistent with the European investment recession ongoing since the end of 2023. In contrast, real construction investment has increased by 2.2 per cent this year. KOF is forecasting that construction investment will continue to grow in all sectors next year and the year after.

Rising unemployment expected; wages likely to grow by 1.8 per cent in nominal terms

The international economy is having an increasingly negative impact on the Swiss labour market. Below-average growth in employment is causing unemployment to rise. Sectors with an international focus, such as hospitality and manufacturing, which already have comparatively high unemployment, are likely to fuel this increase in unemployment. SECO is forecasting that the unemployment rate will rise to just under 3 per cent by 2026. Average wages are likely to increase by 1.8 per cent in nominal terms next year. After deducting inflation of an estimated 0.5 per cent, this results in real wage growth of 1.3 per cent.

Inflation falling more sharply than expected; SNB continues to cut interest rates

Inflation in Switzerland has fallen more sharply than expected in recent months and has been below 1 per cent since September. The main reason for this was lower-than-expected oil prices. Now that the Swiss National Bank (SNB) has cut its key interest rate by 50 basis points in December, KOF expects a further rate cut of 25 basis points in March next year. This would put the key interest rate at 0.25 per cent. A reduction in the reference interest rate next year and slower wage growth should reduce inflationary pressures on rents and domestic services. KOF has therefore lowered the inflation outlook in its forecasts for 2025 and 2026 to 0.5 per cent and 0.6 per cent respectively.

Growing political uncertainty increases forecasting risk

The political environment in many of the economies important to Switzerland is uncertain. This is likely to affect economic activity in these markets in various ways. The forecast assumes that the Trump administration’s threats to impose tariffs on China, Mexico and Canada will have a minimal impact. However, these effects could be greater and hit more countries than assumed. This could lead to retaliatory tariffs and even trade wars, which would affect all countries involved and significantly weaken global trade. Additional tariffs would also fuel inflation, which could force central banks to keep interest rates elevated for longer. Geopolitical conflicts such as any further escalation of the wars in Ukraine and the Middle East as well as renewed threats made by China towards Taiwan could trigger commodity price shocks, which could hamper global trade and cause supply-chain disruption.

One upside risk is that the Trump administration’s tax cuts and deregulation measures could fuel a boom in the US and therefore – provided any trade restrictions remain limited – support the global economy. Unexpectedly low inflation rates could boost private consumption in the US and Europe. In addition, a faster recovery in capital investment owing to easing uncertainty and a swifter return to expansionary monetary policy would accelerate the global economic recovery.