IMF Executive Board Concludes 2009 Article IV Consultation with Switzerland

Switzerland is affected by the global crisis through the stock effect, the flow effect, and the trade effect. Along with a sharp contraction in exports, investments are now being postponed. Consumption has held up well so far, but as unemployment rises, household spending will lose momentum. The Swiss National Bank has appropriately loosened monetary policy, bringing the policy rates almost to zero. Maintaining financial stability will be essential for ensuring macroeconomic stability and growth in Switzerland.


Switzerland is affected by the global crisis through the stock effect, the flow effect, and the trade effect. Along with a sharp contraction in exports, investments are now being postponed. Consumption has held up well so far, but as unemployment rises, household spending will lose momentum. The Swiss National Bank has appropriately loosened monetary policy, bringing the policy rates almost to zero. Maintaining financial stability will be essential for ensuring macroeconomic stability and growth in Switzerland.

On May 18, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland. 1


Switzerland’s recent economic performance has been strong. From 2004 to 2007 real GDP growth remained above potential—and the euro area average—while inflation was muted. Exports and financial service flows rose rapidly in line with a favorable external environment, and unemployment fell to 2½ percent, even as cross border workers and immigration flows increased labor supply. A fiscal rule resulted in budgetary surpluses in 2006–07 of some 2 percent of GDP.

Global credit strains, however, have had an impact on the financial sector. Financial sector writedowns have been substantial, requiring sizeable capital injections and staff cuts. While deleveraging at financial institutions is ongoing, domestic lending has remained on a steady pace. The absence of a housing and credit bubble, in particular, has helped to support credit growth.

The economy entered a recession in the second half of 2008. Growth in exports slowed, falling from 9½ percent in 2007 to 2¼ percent in 2008, with a marked fall in the fourth quarter, as world trade collapsed. From the supply side, financial intermediation value added declined by about 7 percent. Investment spending contracted since the second quarter, as firms scaled back plans given the deteriorating outlook. However, with labor markets robust, private consumption grew by a still healthy 1.7 percent, a rate not much lower than in 2007. Leading indicators, however, suggest the downturn will deepen. Economic growth is expected to decline from 1.6 percent in 2008 to -3.0 percent in 2009 as the worsening external environment takes its toll on exports and financial sector inflows, and lower employment will gradually weaken consumption.

Headline inflation averaged 2.4 percent in 2008, while core inflation was about 1½ percent. CPI inflation declined sharply in late 2008 due to fuel and food price decreases and is expected to remain negative in the near-term, given base effects and a weak global environment. For 2009, inflation is projected to average -0.6 percent, with negative inflation continuing into 2010. Flat real wage growth helped to support competitiveness, but export market shares have fallen.

With inflationary expectations declining rapidly, and the currency appreciating due to safe haven effects, the SNB aggressively relaxed the monetary stance. The SNB’s target range for the 3-month Libor has been decreased by 250 basis points since October and now stands at 0 to 0.75 percent. To counter an unwanted tightening of monetary and financial conditions, the SNB implemented quantitative easing measures in March, including foreign exchange intervention to limit upward pressure on the Swiss franc.

The fiscal stance was neutral in 2008. The general government recorded a surplus of about 1 percent, as continued surpluses at lower levels of government offset a small federal deficit. Debt to GDP ratios have fallen below 42 percent but aging-related expenditures are expected to reverse this trend in the medium-term. A fiscal impulse and full use of automatic stabilizers are expected to push the general government balance into deficit in 2009.

Executive Board Assessment

Executive Directors welcomed Switzerland’s strong growth performance over the last few years, but noted that the global financial crisis and collapse in world trade had pushed the Swiss economy into a recession in the second half of 2008. Given Switzerland’s openness and the size of its financial sector, the economy is projected to experience a significant contraction in the near-term, with sizable downside risks to the outlook.

Against this background, Directors observed that the key policy priority is to maintain domestic financial stability, which would contribute also to international financial stability given Switzerland’s strong international linkages. They commended the authorities for their proactive and effective response to date to limit the fallout from the financial turbulence. In particular, Directors welcomed the relaxation of macroeconomic policies, creation of the bank stabilization fund, enhancements to deposit insurance, and introduction of innovative capital requirements, including a minimum leverage ratio. They also praised the authorities for their active cooperation with other central banks, including in Eastern Europe, to ensure liquidity to the international interbank market.

Looking ahead, Directors noted that persistent financial sector turmoil may require further policy actions. They therefore welcomed the authorities’ commitment to take prompt action if needed and their preparation of contingent policy strategies. With regard to the financial sector, Directors stressed that strong and effective regulation and supervision will remain key, with a particular focus on monitoring of potential vulnerabilities—such as earnings of the large banks and related funding pressures—and on early response to risks. Directors welcomed the increased capital requirements for large banks and the authorities’ recognition of the need to avoid exacerbating the downturn by tightening these rules too soon. Some Directors felt that government guarantees could be helpful to ensure funding of systemically important institutions. Directors considered that the deposit insurance scheme, while improved, should be put on a sounder footing through the introduction of ex ante funding.

Directors observed that the creation of a new integrated supervisor (FINMA) provides a good opportunity to strengthen financial supervision. To this end, FINMA should make further progress in enhancing resources, integrating sectoral regulatory approaches, and strengthening forward-looking systemic surveillance. Continued intensive oversight of large banks as well as close supervision of the large (re)insurance sector will also be essential. Other important actions will be increased on-site examination by FINMA staff and strengthened pension fund supervision undertaken by the cantons. Directors welcomed the adoption by Switzerland of the OECD standard on administrative matters, which will permit a fuller exchange of information with foreign tax authorities.

Executive Directors supported the authorities’ relaxation of monetary policy as growth prospects and inflationary expectations have declined. Most Directors considered that the recent shift to quantitative easing—including intervention in currency markets to stem further appreciation pressures—was appropriate, and reflected limited options to further influence monetary conditions and counter deflation risks. Directors welcomed the authorities’ commitment to a timely and orderly exit from quantitative easing once recovery commences, and their intention to reverse the build-up in the monetary base to protect price stability. Careful communication of policy intentions by the authorities will remain important.

Directors commended Switzerland’s strong fiscal performance in recent years, which has provided room for the welcome fiscal stimulus in the 2009 budget and the full use of automatic stabilizers. Many Directors considered that a further stimulus package in 2010 would be appropriate given the severity of the current downturn and the available fiscal space. Many other Directors, however, supported the authorities’ intention to consider further stimulus in 2010 should prospects deteriorate further, and underlined the need to preserve fiscal space for possible additional financial sector support given the significant uncertainty surrounding global financial developments. All Directors agreed, however, that long-term fiscal sustainability requires that any new stimulus be temporary and targeted, and that long-term reforms of entitlement programs remain firmly on the authorities’ agenda.

While noting that Switzerland’s large external current account surplus largely reflects structural factors, Directors recognized that writedowns of financial assets and a decline in investment flows will likely cause a reduction in the surplus in the near-term. Taking into account these considerations, Directors agreed with the staff assessment that the exchange rate appears broadly in line with fundamentals.

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Switzerland is also available.

Switzerland: Selected Economic Indicators

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Sources: IMF, International Financial Statistics; IMF, World Economic Outlook; and IMF staff projections.

Staff estimates and projections.

Including Confederation, cantons, communes, and social security.

Excluding gold.

Based on 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.

Switzerland: 2009 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Switzerland
Author: International Monetary Fund