Journal Issue

IMF Executive Board Concludes 2018 Article IV Consultation with Switzerland

International Monetary Fund. European Dept.
Published Date:
June 2018
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On June 11, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Switzerland.

The economy has adjusted to the large cumulative exchange rate appreciation that took place since the global financial crisis. After a subdued start to 2017, GDP growth accelerated to 1.1 percent last year, and the positive momentum continued in Q1:2018, although at a slightly reduced pace. The improved external outlook, together with the depreciation since mid-2017, are expected to energize the economy and lift GDP growth to 2¼ percent in 2018, before it gradually moderates to 1¾ percent over the medium term. After five years of falling or flat prices, headline inflation turned positive in mid-2016 and had risen to 1.0 percent in May 2018. Inflation is expected to increase to the upper half of the target band in 2018–19, and to subsequently revert to the mid-point. The better global environment had—until recently—halted safe-haven appreciation pressures, and the franc weakened by around 8 percent in real effective terms during mid-2017 to April 2018. The current account surplus has remained large and relatively stable around 10 percent of GDP.

Policies adopted in recent years have aided the recovery and mitigated risks. The two-pronged approach to monetary policy—combining a negative interest rate with foreign currency purchases—has supported the return of modest inflation and the recovery of growth. A series of macroprudential measures was introduced targeting systemic risk in the real estate market, although prices remain high relative to household income and exposure to mortgage debt is elevated. The fiscal position has remained strong with sustained small surpluses and declining public debt.

The Swiss economy continues to face important challenges. Rising international trade tensions could impact Switzerland’s externally-oriented economy and more uncertain geopolitics could rekindle safe-haven pressures, sharply appreciating the franc. A resurgence in global inflation could trigger an abrupt policy tightening by major central banks, leading to spillovers to Swiss property prices. Population aging and slower immigration will create funding gaps in the public pension system. Uncertainty regarding long-term Swiss-EU relations could affect cross-border flows. Initiatives leading to abrupt institutional changes could undermine public confidence, and further delays in meeting international standards on corporate income taxation (CIT) could reduce Switzerland’s appeal as an investment destination.

Executive Board Assessment2

Executive Directors commended the Swiss authorities for skillfully navigating the economy through challenging times. Despite the substantial pressures on the exchange rate since the global financial crisis, the economy continues to demonstrate resilience. Prospects remain favorable, with moderate growth and inflation. The outlook is nevertheless subject to risks, including from international trade tensions, renewed safe-haven pressures, imbalances in the mortgage and property markets, and uncertainty about corporate tax reform. Directors underscored the need for continued vigilance and sustained reform to raise potential growth and competitiveness.

Directors concurred that the current accommodative stance of monetary policy is appropriate. With inflationary pressures expected to remain low, they recommended that future decisions be gradual and well-communicated, guided by domestic conditions while also taking into consideration actions by major central banks. Directors considered that the two-pronged monetary policy has effectively supported inflation and growth. They saw merit in clearly assigning policy tools to help further enhance communications with markets, using interest rates to address cyclical conditions and interventions to respond to excessive foreign exchange market volatility.

Directors agreed that the debt brake fiscal rule has served Switzerland well, contributing to the reduction in public debt and counter-cyclical support. Given constraints on monetary policy, most Directors encouraged the authorities to adopt a balanced structural position by utilizing the available fiscal space, which would allow for a more balanced mix of macroeconomic policies in support of domestic demand, facilitating the reduction of the high current account surplus. A number of Directors saw a need to remain prudent, noting that additional fiscal spending should depend on the nature of the shock. Directors welcomed recent initiatives to increase the flexibility of spending within and outside of the rule, and consideration of possible amendments to address persistent budget underruns.

Directors commended the authorities for the progress in enhancing the resilience of the banking sector, including through the tightening of macroprudential policies. They noted vulnerabilities from sustained low interest rates and elevated exposures to real estate by both financial institutions and households. In this regard, Directors saw scope for targeting macroprudential measures to contain risk-taking in the property market and removing tax incentives that encourage leveraged acquisition of real estate.

Directors emphasized the importance of continued structural reform to enhance productivity and preserve Switzerland as a prime destination for foreign investment. Specifically, they encouraged reforming the pension system to ensure its long-term viability and further enhancing compliance with international standards on taxation, tax transparency, and AML/CFT. Promptly adopting the corporate income tax reform would help boost investment by small- and medium-sized firms, encourage R&D, and improve competitiveness of labor-intensive sectors.

Switzerland: Selected Economic Indicators, 2016–23
Staff projections
Real GDP (percent change)
Total domestic demand0.
Private consumption1.
Public consumption1.
Gross fixed investment3.
Inventory accumulation 1/−1.4−1.3−
Foreign balance 1/
Nominal GDP (billions of Swiss francs)659.0668.2691.4713.1733.7753.3773.4794.0
Savings and investment (percent of GDP)
Gross national saving32.533.533.933.433.533.532.832.5
Gross domestic investment23.123.723.623.623.823.823.323.2
Current account balance9.49.810.
Prices and incomes (percent change)
GDP deflator−
Consumer price index (period average)−
Consumer price index (end of period)
Nominal hourly earnings0.
Unit labor costs (total economy)−
Employment and slack measures
Unemployment rate (in percent)
Output gap (in percent of potential)−0.2−
Capacity utilization81.081.6
Potential output growth1.
General government finances (percent of GDP)
Cyclically adjusted balance0.
Gross debt 2/41.941.840.338.737.336.134.933.8
Monetary and credit (percent change, average)
Broad money (M3)3.03.6
Domestic credit, non-financial3.12.5
Three-month SFr LIBOR−0.7−0.7
Yield on government bonds (7-year)−0.6−0.3
Exchange rates (levels)
Swiss francs per U.S. dollar (annual average)1.01.0
Swiss francs per euro (annual average)1.11.1
Nominal effective rate (avg., 2000=100)124.1123.4
Real effective rate (avg., 2000=100) 3/112.2107.4
Sources: Haver Analytics; IMF’s Information Notice System; Swiss National Bank; and IMF Staff estimates.

Contribution to growth. Inventory accumulation also includes statistical discrepancies and net acquisitions of valuables.

Reflects new GFSM 2001 methodology, which values debt at market prices. Calculated as the sum of Federal, Cantonal, Municipal and Social security gross debts.

Based on relative consumer prices.

Sources: Haver Analytics; IMF’s Information Notice System; Swiss National Bank; and IMF Staff estimates.

Contribution to growth. Inventory accumulation also includes statistical discrepancies and net acquisitions of valuables.

Reflects new GFSM 2001 methodology, which values debt at market prices. Calculated as the sum of Federal, Cantonal, Municipal and Social security gross debts.

Based on relative consumer prices.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:

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