Swiss economy hit by international trade conflict

The international trade conflict is more pronounced than was expected in the spring and is triggering a more marked deterioration in economic projections. The latest KOF forecast is based on the assumption that the tariffs on exports to the United States in force at the beginning of June and the corresponding countermeasures will remain in place throughout the entire forecast period. This equates to a flat-rate 10 per cent tariff on most imports to the US with the exception of pharmaceutical products for the most part.

Companies fast-track exports to the US; countervailing trend likely to follow

The great uncertainty about the future of the United States' trade policy and the announcement of tariff increases imposed on countries around the world have prompted firms to bring forward their production and exports of goods to the United States as much as possible. This yielded stellar growth in global trade in the first quarter and strong GDP growth in export-led countries such as Germany. In contrast, the disproportionately high growth in imports in the United States resulted in a negative quarter. Short-term demand for foreign goods displaced that for domestic goods and thus had an adverse impact on output in the US. Countervailing trends can be expected over the coming quarters. Higher tariffs and the high level of uncertainty will continue to weigh on the global economy. By contrast, falling inflation, loose monetary policy and increasing fiscal stimulus are likely to have a positive effect – particularly in Europe.

Investment climate and consumer sentiment weakening in Switzerland

The first quarter in Switzerland was also characterised by firms fast-tracking certain measures. Manufacturing industry posted above-average growth, driven by exports of pharmaceutical products to the United States. However, the retail and wholesale trades as well as financial and business-related services also had a strong quarter. A countervailing trend can also be expected in Switzerland in the short term. These economically sensitive sectors are likely to be adversely affected by the protectionist trade policies of the United States in the long term. The investment climate and consumer sentiment have recently deteriorated and are likely to remain subdued for the time being. Although private consumption is increasingly suffering from a weakening labour market, it continues to have a benign effect. Low inflation and accommodative monetary policy are forecast to have a positive effect throughout the rest of the year.

Swiss labour market continues to cool

The outlook for the labour market remains subdued. Leading indicators such as the KOF Employment Indicator have drifted back towards their long-term average. While the SECO unemployment rate is likely to rise to a cyclically neutral level of 3 per cent by the end of the year, KOF expects to see a slower increase in employment than in previous quarters owing to economic policy uncertainty in the summer, with employment slowly picking up again as the economy recovers.

Low inflation and zero interest rates expected

The strong Swiss franc and lower energy prices are depressing inflation. Given lower-than-expected services inflation, KOF is adjusting its inflation forecast for the current year from 0.5 per cent to 0.2 per cent. It is revising its forecast for 2026 from 0.6 per cent to 0.5 per cent. Inflation is currently just below zero. In view of this declining inflation momentum and the strong Swiss franc, KOF expects the Swiss National Bank (SNB) to cut interest rates by 25 basis points in June. It reckons that the SNB will not loosen its monetary policy any further over the forecast period and will therefore leave its key interest rate at zero.

Trade war, high national debt and geopolitical conflicts as forecasting risks

There are still several forecasting risks. Any further escalation of trade restrictions could provoke a backlash and thus affect sensitive supply chains, reignite inflation and force central banks to tighten monetary policy again. The high levels of national debt in many European countries and the United States could compel governments to take stronger consolidation measures and further restrict the fiscal headroom available.