Switzerland: Staff Report for the 1999 Article IV Consultation Supplementary Information

For the past quarter century, Switzerland’s real per capita growth rate has been substantially slower than in most other industrial countries. Unemployment has declined rapidly to 2.4 percent of the labor force in November 1999 from its 1997 peak of more than 5 percent. Inflation has edged up from exceptionally low levels. Switzerland’s longstanding current account surplus was above 9 percent of gross domestic product in 1998 and is estimated to have risen further in 1999. The franc has shadowed the euro closely since January 1999, fluctuating narrowly around 1.6 Sw F/euro.

Abstract

For the past quarter century, Switzerland’s real per capita growth rate has been substantially slower than in most other industrial countries. Unemployment has declined rapidly to 2.4 percent of the labor force in November 1999 from its 1997 peak of more than 5 percent. Inflation has edged up from exceptionally low levels. Switzerland’s longstanding current account surplus was above 9 percent of gross domestic product in 1998 and is estimated to have risen further in 1999. The franc has shadowed the euro closely since January 1999, fluctuating narrowly around 1.6 Sw F/euro.

1. This statement provides information on economic and financial developments that has become available since the issuance of the staff report (SM/00/13, 1/24/00). This information does not alter the thrust of the staff appraisal.

2. Recent indicators confirm that the recovery has been gathering momentum, in line with projections in the staff report. The composite leading economic indicator rose for the thirteenth consecutive month in December 1999. Merchandise exports increased strongly at end-year, and consumer confidence has climbed to an 11-year high. Unemployment increased slightly to 2.6 percent in January 2000, reflecting seasonal factors.

3. Headline CPI inflation declined by 0.1 percentage point in January to 1.6 percent. Excluding the effect of energy prices, CPI inflation remained unchanged at 0.8 percent. Headline inflation is projected by staff to decline somewhat further in the coming months as the effects of the VAT increase in early 1999 and the sharp rise in energy prices fade out from the calculation, outweighing effects of the recent weakening in the nominal exchange rate.

4. As noted in the staff report, on January 20th the Swiss National Bank (SNB) announced that it would target the three-month LIBOR rate in the upper—rather than (as previously) the middle—part of its 1¼–2¼ percent range, in view of increasing signs of an improved cyclical position. More recently, following the February 3 interest rate hike by the ECB, the SNB raised the target range by half a percentage point to 1¾–2¾ percent and announced that it would keep the three-month LIBOR at the middle of the new range. The SNB announced that this move was aimed at counteracting inflation risks stemming from relaxation of monetary conditions associated with the weakening of the Swiss franc in nominal effective terms. All in all, the three-month LIBOR has increased from 1¼ percent in mid-September 1999 (before the SNB acted to raise interest rates) to 2¼ percent in mid-February 2000, with ¼ percentage point coming since the February 3 announcement (Figure 1). With the nominal effective exchange rate having depreciated by 2¼ percent since September (Figure 2), the staff estimates that monetary conditions have remained broadly unchanged (Figure 3). As indicated in the report, monetary conditions are appropriately supportive for this stage of the cycle although some firming will be warranted in due course as remaining slack is absorbed.

Figure 1.
Figure 1.

Switzerland: Three-Month Swiss France LIBOR

Citation: IMF Staff Country Reports 2000, 023; 10.5089/9781451807172.002.A002

Figure 2.
Figure 2.

Switzerland: Exchange Rate Developments

Citation: IMF Staff Country Reports 2000, 023; 10.5089/9781451807172.002.A002

Figure 3.
Figure 3.

Switzerland: Monetary Conditions Index

Citation: IMF Staff Country Reports 2000, 023; 10.5089/9781451807172.002.A002

1/ Based on nominal interest and exchange rates with weights proportional to 2.5 and 1, respectively; 1994=1.
Switzerland: Staff Report for the 1999 Article IV Consultation
Author: International Monetary Fund