Journal Issue

IMF Executive Board Concludes 2016 Article IV Consultation with Switzerland

International Monetary Fund. European Dept.
Published Date:
December 2016
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On November 21, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Switzerland.

The economy withstood relatively well the sharp appreciation that followed the exit from the exchange rate floor. Economic performance has continued to firm in 2016 with support from domestic and external demand. GDP growth is forecast to reach 1.5 percent in 2016, and to stabilize at 1.7 percent over the medium term. Inflation is expected to return to positive territory in 2017 and to continue to rise to the middle of the target band. However, important external and domestic risks could affect this outlook, including a resurgence in global financial market volatility, renewed concerns about the financial health of large global banks, sharp swings in domestic property prices and changes in Swiss-EU economic relations.

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—together with support from fiscal policy helped to avert sustained deflation, a prolonged slowdown of the economy and an increase in unemployment following the exit from the exchange rate floor. A series of macroprudential measures stabilized house prices following an extended period of continuous increases, although prices remain high relative to household income and exposure to mortgage debt is elevated. The recently introduced stricter capital standards for the Swiss global banks (G-SIBs)—to be fully adopted by 2019—are intended to further boost their financial strength and insulate the domestic economy from financial contagion.

The Swiss economy continues to face important challenges. Weaker external demand and the possibility of further large capital inflows may warrant additional policy support and some rebalancing of policies. The global low interest rate environment could rekindle house prices and financial stability risks. Population aging and slower immigration will create funding gaps in the public pension system, while minimum mandated interest rates for private pensions that exceed market rates could affect long-run viability. Corporate tax reform is expected to trim future fiscal revenue. Productivity enhancements would increase flexibility to absorb shocks and help preserve the high standard of living.

Executive Board Assessment2

Executive Directors welcomed the resilience of the Swiss economy to the appreciation that followed the exit from the exchange rate floor, and commended the authorities’ policy response, which shielded the economy and set the conditions for a rapid recovery. Medium-term growth prospects have also improved owing to the gradual unwinding of the real appreciation. Directors, however, noted that a resurgence of capital inflows, sharp swings in domestic property prices, concerns over large global banks, or changes to Swiss-EU economic relations could pose challenges. They agreed that continued skillful policy management will be important going forward.

Directors considered the Swiss National Bank’s two-pronged monetary policy, which combines a negative interest rate and foreign exchange purchases, effective at averting a prolonged slowdown and sustained deflation. They noted that the Swiss franc’s status as a safe haven currency could shape the policy response, and that sharp appreciations were recently avoided despite episodes of capital inflow surges. While over the longer term Directors saw scope for additional upward flexibility of the franc, most Directors recommended that consideration be given to a modest widening of the negative interest rate differential to deal with sustained inflow pressures in the context of an overvalued exchange rate, thereby reducing the need for frequent small foreign currency purchases and slowing the growth of the Swiss National Bank’s already large balance sheet. A few Directors, however, expressed concern that monetary policy is being overburdened and any further real depreciation would increase the current account surplus.

Directors welcomed the counter cyclical stabilization and scope for extraordinary support provided under the fiscal debt brake rule, and observed that public debt had declined to moderate levels. Given the available fiscal space and constraints on monetary policy, Directors saw scope for additional fiscal support, including by fully utilizing the room available under the existing debt brake framework. A few Directors, however, did not see the need at this point to adapt fiscal policy to allow for higher spending or as suitable to address an overvalued currency.

Directors commended the earlier tightening of macroprudential policies that contributed to the recent stabilization of house prices. They noted however, the elevated exposure to real estate by borrowers and lenders, and the risk that competition among lenders could drive down interest rates, triggering a renewed upswing in the mortgage credit house price cycle. Timely preparation of new property related measures and strengthened supervision is therefore appropriate.

Directors considered the recently introduced too-big-to-fail regulations for large Swiss cross border banks as appropriately more stringent than the Basel minimum requirements, reflecting these banks’ large size relative to the Swiss economy and their systemic risk profile. More generally, they agreed that review of risk weights that banks use in their internal ratings based models is warranted and greater public disclosure of these weights should be considered, in line with the forthcoming revisions to Basel requirements, to strengthen the credibility of banks’ financial reporting.

Directors recommended continued structural reforms to support medium term growth and reduce risks. Early adjustment of pension system parameters would help ensure the long-term viability of the social safety net. Continuing to meet international standards, particularly the AML/CFT and tax transparency standards, is essential to preserve Switzerland as a prime destination for foreign investment and protect the integrity of its banks. Directors highlighted that strengthening productivity would help insulate the economy from future exchange rate shocks and a possible slowing in the growth of the labor force, while the corporate income tax reform could boost investment by small and medium-sized firms. Continuing to welcome foreign workers and maintaining close economic ties with the EU would help safeguard Switzerland’s high standard of living.

Switzerland: Selected Economic Indicators, 2014–21
Staff projections
Real GDP (percent change)
Total domestic demand2.
Final domestic demand1.
Private consumption1.
Public consumption1.
Gross fixed investment2.
Inventory accumulation 1/0.30.5−0.3−0.2−0.1−
Foreign balance 1/0.2−
Nominal GDP (billions of Swiss francs)643.8645.6651.9661.1673.3687.9704.5722.3
Savings and investment (percent of GDP)
Gross national saving31.834.333.733.633.433.333.133.1
Gross domestic investment23.023.023.724.024.224.324.324.3
Current account balance8.811.310.
Prices and incomes (percent change)
GDP deflator−0.6−0.5−0.5−
Consumer price index (period average)0.0−1.1−
Consumer price index (end of period)−0.3−
Nominal hourly earnings0.
Unit labor costs (total economy)0.11.3−
Employment and slack measures
Unemployment rate (in percent)
Output gap (in percent of potential)−0.3−0.8−0.7−0.6−0.4−0.3−0.20.0
Capacity utilization82.0
Potential output growth1.
General government finances (percent of GDP)
Cyclically adjusted balance−
Gross debt 2/46.646.646.145.544.743.942.741.4
Monetary and credit (percent change, average)
Broad money (M3)3.31.6
Domestic credit, non-financial2.70.6
Three-month SFr LIBOR0.0−0.8
Yield on government bonds (7-year)0.4−0.3
Exchange rates (levels)
Swiss francs per U.S. dollar (annual average)0.91.0
Swiss francs per euro (annual average)1.21.1
Nominal effective rate (avg., 2000=100)115.4124.8
Real effective rate (avg., 2000=100) 3/104.6112.4
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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