Economic recovery continues – diversify risks, says KOF

Gross domestic product (GDP) will increase by 3.2% in 2021 and by 3.6% in 2022. By 2023, production should return to its pre-crisis growth rate.

The Swiss economy is developing positively. The pace of this expansion will normalize by the end of 2023. Gross domestic product (GDP) is set to increase by 3.2% in 2021 and 3.6% in 2022. In 2023, production is expected to return to pre-crisis levels.

Economic recovery partly postponed to 2022

The economic situation for the years 2021 and 2022 has not fundamentally changed compared to the KOF forecast in June. However, the supply difficulties of the global economy and the evolution of the pandemic in Switzerland have led to slightly more reserved forecasts for the current year. For example, the recovery is partially postponed to 2022, for which current forecasts represent a slight upward revision. Adjusted for revenue from major international sporting events, GDP growth is projected to be 3.0% this year, 3.4% in 2022 and 1.8% in 2023.

Supply chain problems slow down the global economy

International economic development continued to decouple from the pandemic. World production, weighted by Swiss export shares, is now almost back to pre-crisis levels. However, growth in international trade in goods is now expected to return to normal, with the catching-up effects in the goods categories particularly affected by the pandemic having largely completed. However, in many parts of the world, KOF still sees catching up in the service sector. In addition, some of the value chains disrupted during the pandemic have yet to return to pre-Covid-19 levels, leading to bottlenecks in supply chains. The result is production restrictions and price increases that are hampering the economic recovery next winter. The KOF assumes that the bottlenecks will decrease from the first quarter of 2022 and will have little effect on production.

The pharmaceutical sector, driving force behind Swiss exports

Since the precipitous fall in the spring of 2020, the Swiss economy has experienced a bumpy and sometimes strong recovery. The correlation between proven infection rates and restrictions on economic activity has decreased over time, thanks in part to the vaccination campaign in Switzerland. The main drivers of the recovery on the demand side were catching-up spending by private households and on the production side the reopening of hospitality businesses and personal service providers. The industrial recovery has been relatively weak, especially in manufacturing sectors hit by the difficulties of international supply chains – with the exception of the pharmaceutical industry. Pharmaceutical exports have been and are a strong pillar of growth: they have been growing significantly for years, both in volume and in share of Swiss goods exports.

KOF expects labor market to relax

The labor market seems to be recovering well from the crisis: in terms of registered unemployed, partial unemployment, but also according to the employment statistics of the FSO, the summer semester was encouraging. However, the situation is less rosy when looking at the recently published unemployment figures according to the definition of the International Labor Organization (ILO) and employment statistics. However, the KOF still expects a strong easing of the labor market in the second half of 2021 and the following winter semester. Partial unemployment should continue to fall, the percentage of unemployed and unemployed should fall significantly. Employment and the number of people in the workforce are expected to increase strongly as employment-intensive service sectors will benefit from the reduction in restrictions. However, workers are likely to be disappointed by wage increases, because after inflation there will be little real purchasing power gains.

Temporary inflationary pressure

Inflation in Switzerland has accelerated in recent months. However, prices normalize from a low level in the pandemic year (2020). The main drivers of this development are the prices of air travel, package holidays and hotel stays. These had fallen rapidly and sharply after the pandemic. This also applies to energy prices, which are currently contributing strongly to the rise in price levels. The current inflationary pressure should therefore be temporary, according to the KOF. Overall, slack and less dynamic nominal wage developments will continue to keep inflation low. However, the KOF inflation forecast is slightly higher than in June due to rising rents and prices of goods from abroad. The KOF predicts an average inflation rate of 0.5% this year, 0.6% next year and 0.4% in 2023.

Forecasting risks are no longer dominated by the pandemic alone

The risks weighing on the forecast are no longer dominated by the uncertainties associated with the pandemic, but must now be sought in the economy itself. In particular, mention should be made of the international difficulties in transport and production, the associated risks of inflation, in particular the sharp rise in energy prices, the evolution of the Chinese real estate market and the warnings of overheating of the Swiss real estate market.

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