Swiss Economy Set for Recovery with European Support, Says KOF

European Economic Improvements

The main reason for the projected recovery is the improving economic situation in Europe. According to the latest KOF forecast, countries like Germany, France, and Italy are expected to see increased consumer spending and higher investment levels. These positive developments in key European economies are set to boost Swiss exports.

Better Prospects for Industry

Recent below-average growth in European countries had slowed the export-driven part of the Swiss economy. However, the momentum in exports is now picking up. KOF forecasts that exports of goods and services (excluding valuables) will grow by 2.9% in 2024 and 2.7% in 2025. Consequently, value added in the manufacturing sector is expected to rise again after recent weak quarters.

Inflation and Wage Growth

Additional benefits will come from lower inflation rates, which KOF predicts to be 1.3% in 2024 and 1.0% in 2025. This decrease in inflation is expected to lead to real wage growth, offsetting the real wage losses experienced over the past two years. Although the labor market remains robust, it is not as strong as it has been in the past three years.

Interest Rate Cuts by SNB

The changes in inflation rates also pave the way for further interest rate cuts by the Swiss National Bank (SNB). KOF expects the SNB to reduce the key interest rate to 1.25% next Thursday and then to 1% in March 2025. Such cuts would further support the Swiss economy.

Uncertainties and External Factors

As usual, KOF highlights several uncertainties. For instance, unexpectedly strong second-round effects of persistently high inflation in the eurozone and the US could dampen the optimistic outlook. Conversely, a sharper-than-expected drop in inflation in these regions could boost purchasing power and private consumption. Additionally, ongoing conflicts in Ukraine and the Middle East present significant uncertainties.

Sport-Adjusted GDP Forecasts

The forecast for Swiss GDP includes unique considerations. The projections are 1.6% for 2024 and 1.4% for 2025. These figures are adjusted to exclude the distortions caused by major sporting events like the Olympic Games and the European Football Championship (Euro 2024). Licensing payments to international sports federations based in Switzerland can skew GDP calculations, so they are excluded for accuracy.

In summary, the KOF Swiss Economic Institute's forecasts present a hopeful outlook for the Swiss economy, driven by improved conditions in Europe and supported by strategic measures such as interest rate cuts. However, vigilance is necessary given the various global uncertainties that could impact these predictions.