Swiss economy caught in the tension between trade conflict and fiscal stimulus

The economic outlook is largely being determined by the latest economic policy events. In particular, the geopolitical strategy adopted by the new US administration has far-reaching consequences for global economic developments. While the current trade conflict is acting as a drag on the international economy, EU countries’ additional fiscal packages should provide increasing impetus from the end of this year and improve the economic outlook in Switzerland’s key European markets.

Growing trade policy uncertainty is weighing on the investment plans of Swiss firms and households. Adjusted for one-off effects, the investment situation remains subdued for the time being. If the fiscal programmes of European trading partners take effect, this should reduce economic policy uncertainty in Europe, provide positive stimulus and boost the economy. This will primarily benefit manufacturing – especially suppliers to the defence sector – and industry-related services. Through the transmission mechanism of foreign trade this should stimulate investment in equipment and, indirectly, private consumption. Major infrastructure projects and fiscal stimulus from Europe should also directly or indirectly support construction investment during the forecast period.

Swiss labour market stabilising, real wages rising

Private consumption will be underpinned by the stabilising labour market. Employment and the number of people in work are likely to increase in line with GDP growth over the next few years, while the unemployment rate as defined by the State Secretariat for Economic Affairs (SECO) will rise only slowly and will soon peak at 3 per cent. KOF expects real wages – according to the Swiss wage index (SLI) – to rise by 0.9 per cent this year and 0.6 per cent next year.

Low inflationary pressures: KOF does not expect any further interest-rate cuts by the SNB during the forecast period

Inflation – as measured by the national consumer price index (CPI) – fell to 0.3 per cent in February compared with the same month last year and has thus been below 1 per cent for six months now. KOF is forecasting inflation rates of 0.5 per cent for this year and 0.6 per cent for next year. Following the recent reduction in the Swiss National Bank’s (SNB) key interest rates by 25 basis points to 0.25 per cent, KOF does not expect to see any further interest-rate cuts during the forecast period.

High uncertainty during the trade conflict; downside risks predominant

As it is still unclear which of the trade policy measures threatened by the Trump administration to date will ultimately be implemented and what further measures might follow, the latest forecast is subject to greater uncertainty than usual, with downside risks predominating. In order to factor in this uncertainty, KOF has used its new trade model to carry out additional calculations, which analyse in detail the possible trade policy measures and their potential impact on both international trade and the Swiss economy. This analysis shows that if the trade conflict spread, this could entail considerable downside risks for the Swiss economy.

The main downside risk is that the US government imposes further tariffs on other countries and products, including any retaliatory tariffs implemented in response. In addition, the fiscal stimulus introduced in Europe may be ineffective or only materialise with a delay. And, finally, geopolitical conflicts such as the wars in Ukraine and the Middle East could escalate, impacting commodity prices and global trade.

There is an upside risk that the US government’s threatened tariffs will only be used as a bargaining chip and will either not be introduced or will be withdrawn after just a short period of time. And, last but not least, a swift end to the war in Ukraine and a solution to the Middle East conflict could have a positive impact on energy prices and global trade.