Global economic woes reach Switzerland

Declining economic fortunes have left the Swiss central bank with plenty to think about. © Keystone / Anthony Anex

Interest rate hikes by central banks are slowing growth in many of the world's major economies. This development is now also reaching Switzerland, where in addition, there are home-made problems.

The economy has lost momentum: the eurozone is barely growing, the economic engine is sputtering in China and the United States, and gross domestic product is shrinking in Germany. Switzerland has now started to feel the impact. At the beginning of September, the State Secretariat for Economic Affairs (Seco) reported zero growth for the Swiss economy for the first time since the Covid-19 crisis.

The latest edition of Geldcast hears the views of Christoph Schaltegger, Director of the Institute for Economic Policy at the University of Lucerne, and Yves Wegelin, economic journalist at the weekly newspaper WOZ, on the new UBS, banking regulation, the role of the Financial Market Supervisory Authority (FINMA) – plus, weak economic data, falling real wages and rising rents.

The manufacturing and pharmaceutical industries have been hit hardest by the economic slowdown. And the construction sector has also seen negative growth recently. The reason is rising interest rates: The Swiss National Bank (SNB) has raised its key interest rate from -0.75% to 1.75% in just one year to fight inflation. This makes investments more expensive and slows down the economy.

Add to that is the economic downturn felt by Switzerland’s major trading partners, including Germany. As a rule of thumb: if Germany coughs, Switzerland will also get sick, because local companies will be able to export less.

Purchasing power declines

At the same time as economies take a dive, people in Switzerland can also afford less and less.

According to the Federal Statistical Office, wages rose 0.9% last year – not enough to compensate for price increases of 2022. Last year, a typical purchase in Switzerland became 2.8% more expensive. Economists speak of a real wage loss in such cases.

This is precisely why the Swiss Federation of Trade Unions is now calling for a general wage increase of 4 to 5%. But it will have a hard time in convincing others. A survey conducted by ETH Zurich’s economic research unit in August 2023 shows that companies expect to raise their wages by only 2% – even though they assume that inflation will once again exceed 2% in 2023. If this happens, Swiss employees will be facing the third consecutive year of real wage losses following 2021 and 2022.

Real wages also falling abroad

What’s the situation abroad? It’s true that wages in Germany recently rose much more than in Switzerland, but this corresponded with higher inflation. According to the Federal Statistical Office, the bottom line was a real wage loss of 4% in 2022. This means that the loss of purchasing power for German employees was around twice as great as in Switzerland.

In the United States, meanwhile, the situation is less dramatic. Economists at the St Louis Fed have calculated an average real wage loss of only 0.1% for 2022. However, the figure is deceptive because there have been generous wage increases in individual sectors in the US. A more detailed look at changes to real wages reveals that more than half of wage earners suffered a real wage loss of more than 1.7%.

Swiss homegrown problems exacerbate situation

The good news is that consumer purchasing power should soon stabilise again. In both the US and Germany, inflation is now significantly lower again than it was last year. The picture is similar in Switzerland, where inflation has also eased from 3.5% in August 2022 to 1.6% since then.

One of Switzerland’s homemade problems, however, is that the SNB’s interest rate hikes – which are supposed to put the brakes on inflation, and largely do – are leading to rising prices in one important area: rents. This is because landlords are allowed to raise rents when interest rates rise.

Rising interest rates not only slow down economic growth in Switzerland, but also reduce purchasing power via rents. This is one of the reasons the leadership of the SNB declined to raise its key interest rate even further during its September monetary policy meeting.

Author Fabio Canetg holds a PhD in monetary policy from the University of Bern and the Toulouse School of Economics. Today, he teaches in an Economics Master’s program at the University of Neuchâtel, and is also a lecturer MAS at the University of Bern. As a journalist, he works mainly for Swiss Radio and Television (SRF) and swissinfo.ch. He hosts the monetary policy podcast “GeldcastExternal linkExternal link” and the finance podcast “Börsenstrasse FünfzehnExternal linkExternal link“.