On June 17, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Switzerland.

The Swiss economy has performed relatively well in recent years. Buoyant external demand in early 2018 lifted GDP growth to 2½ percent last year, despite a slowdown in the second half on weaker global trade and one-off factors. While a prompt recovery of momentum is expected, carry over from last year will cause annual growth to temporarily dip to 1.1 percent in 2019. Over the medium term, growth is projected to quickly return to a more normal pace of 1½ percent, with the biennial cycle of international sporting events adding some year-to-year fluctuations. Inflation has remained muted, despite a period of rising energy prices and depreciation of the franc in mid-2018, owing to subdued domestically-sourced inflation. Over the medium term, inflation is expected to remain around the mid-point of the Swiss National Bank’s 0–2 percent price stability objective. The current account surplus, which rose to 10.2 percent of GDP in 2018 on recovery in primary income, is expected to remain broadly unchanged.

Overall, policies have been supportive of growth, although no new macroprudential measures have been taken in recent years to address financial stability risks. Accommodative monetary policy, comprising a negative interest rate and a willingness to purchase foreign currency, helped to mitigate safe-haven pressures on the franc, thereby averting deflation and supporting real activity. Sustained structural fiscal surpluses, amid moderate-and-declining public debt and negative borrowing costs, have consistently overperformed the objective of the debt brake rule, thereby providing an unwarranted drag on growth during periods of cyclical weakness. Despite the long period of low interest rates, which has fueled risks in the real estate and mortgage markets, no tightening of macroprudential policies has been implemented since 2014.

Looking ahead, the Swiss economy is facing several external and domestic downside risks. Weaker-than-expected foreign demand, intensification of global trade tensions, and uncertainty over Brexit could adversely impact the highly-open Swiss economy via trade and financial channels. Volatility in international financial markets could reignite safe-haven pressures and impact the profits of large globally-active banks. On the domestic side, search for yield in a low-growth and low-inflation environment increases risks to financial stability, and any price correction in the real estate market would reverberate through the economy. In addition, further delay in agreeing an institutional framework for Swiss-EU relations and remaining uncertainty regarding key parameters for corporate taxation and old-age pensions could reduce Switzerland’s appeal as an investment destination.

Executive Board Assessment [2]

Executive Directors commended the Swiss authorities for the economy’s good performance since the global financial crisis. Directors considered that prospects are favorable, with moderate growth and subdued inflation, although intensification of international trade tensions, renewed safe‑haven pressures, and imbalances in the domestic real estate market weigh on the outlook.

Directors praised the authorities’ overall management of the macroeconomy, although many Directors saw scope to rebalance the policy mix. Very accommodative monetary policy has helped deter safe‑haven pressures and reverse earlier deflation, but has also encouraged search for yield by the financial sector. Directors concurred that the current accommodative monetary stance should be maintained. While limited room remains to further ease monetary policy if needed to secure price stability, many considered a more prominent role for fiscal policy in view of the substantial fiscal space. A few Directors, however, emphasized that public spending would not be effective at addressing exchange rate shocks. Directors agreed that any reduction in the policy interest rate would also reinforce the need to tighten macroprudential policies. Foreign exchange intervention should be reserved for addressing large exchange market pressures, provided the trend appreciation is allowed.

Directors welcomed the reduction in public debt achieved under the fiscal debt break rule, while recognizing that the current framework has served the country well. Many Directors recommended moving to a balanced structural position in light of the low level of public debt and favorable debt dynamics, including through refinements to avoid underspending. Doing so would allow room for addressing long‑term challenges such as technological change and population aging, and compensating any revenue shortfalls from corporate tax reform. A few other Directors underscored that the primary purpose of the debt break rule is to avoid a deficit bias and ensure the predictability of fiscal policy.

Directors welcomed the FSAP’s findings and endorsed its main recommendations. They supported expanding the macroprudential toolkit to encompass additional mandated instruments, accompanied by a framework with enhanced expectations to act. Directors also recommended strengthening the governance, autonomy, and resources of the financial sector supervisor and recommended allowing it to directly contract and pay for outsourced supervisory audits. They encouraged further reinforcement of the financial safety net and crisis management arrangements, including improving banks’ recovery and resolvability and establishing an effective public deposit insurance agency. To contain risks in the real estate sector brought by low interest rates, Directors called for introducing new measures to restrain demand for high‑risk mortgages, together with tighter amortization requirements and removal of tax incentives that encourage high household leverage. Directors welcomed the authorities’ actions to strengthen anti‑foreign bribery enforcement and looked forward to continued progress in enhancing the anti‑corruption and AML/CFT regimes.

Directors recommended continuing to prepare for population aging, increased automation and new work arrangements. They welcomed the recent approval of the referendum on corporate income taxation and pension systems as important and encouraged prompt implementation of these reforms. They also encouraged maintaining the high‑quality of education and investment in innovation and reviewing social safety nets to ensure they are compatible with new work arrangements.