How will the Swiss economy fare in the years ahead[1]

The heterogeneous Swiss recovery The forecasts published by SECO on March 11 show a recovery in economic activity, bearing in mind that they are subject to uncertainty. This year, real GDP is expected to almost return to its 2019 level and then exceed it by a 3% in 2022. While this is a positive prospect, it should be put into perspective somewhat for two reasons. First, one must take into account the fact that GDP would have continued to grow without the pandemic. Second, the situation varies between the different components of GDP. A heterogeneous decline in activity The figure below shows the level of annual GDP according to the forecasts published by SECO on March 11 (red line) and its forecast of December 12, 2019 (blue line). We can clearly see the stall in 2020 and the subsequent recovery, with an acceleration in 2022. However, this recovery will not be strong enough to return to the growth path that was expected before the pandemic struck, with GDP remaining 1.8% below that path in 2022. It will therefore take some time before the recession is truly behind us. Real GDP 780 760 740 720 700 680 660 640 620 2016 2017 2018 2019 2020 2021 2022 2015 Forecast of December 2019 Forecast of March 2021 The comparison with the December 2019 forecasts can also be made for the various components of GDP. The figure below summarizes the exercise by showing the percentage difference between the levels according to the latest forecasts and those of 2019, for the years 2019 to

2022 (a series of figures at the end of the article shows the evolution of each variable since 2015). The first bars show the gradual recovery of GDP as a whole after the sharp drop in 2020 that brought it 5% below the pre-pandemic trend. The dynamics are very mixed when we look at the components of activity. Private consumption has fallen sharply, and will take time to recover. The same cannot be said for government spending (all levels of government), which has played its role in stabilizing the economy, albeit with a lag. Its 2020 level is in line with forecasts made at the end of 2019 (noting, however, that government spending in 2019 ultimately turned out to be more moderate than expected). Spending is expected to accelerate in 2021, well above the pre-crisis forecast, and this gap will only partially close in 2022. While business investment fell in 2020, the decline was more muted than for consumer spending, reflecting the fact that industries under lockdown are primarily consumption- oriented. This more limited initial decline in investment will be offset by a more gradual recovery, with gaps closing only very slowly, if at all for construction. In terms of final demand (consumption, government spending, and investment), the recovery will be gradual, with the strength of government spending partially offsetting the weakness of private spending. Gap from the pre-Covid forecasts (real GDP) -15% -10% -5% 0% 5% GDP Consumption Government spending Investment Construction Equipment goods Final demand Exports Imports 2019 2020 2021 2022 Activities linked to the rest of the world have seen the most marked decline. In 2020 exports were 12% below the level expected at the end of 2019. The gap persists in 2021 and will only

narrow slightly in 2022. Imports show a similar decline. Swiss growth will therefore not be able to rely much on the global economy. An analysis in terms of nominal GDP shows that the trade balance was 15% below the expected level in 2020, and this weakness will persist in 2021 (- 10%) and 2022 (-4%). Will the weight of the state increase? Yes, but temporarily and to a limited extent. The fact that public spending turned out to be higher than expected mechanically implies an increase in its share of GDP. The figure below shows the evolution of this share since 1980 according to the latest figures (red line), as well as according to the December 2019 forecasts (blue line). We clearly see a sharp increase in 2020, with public spending rising from 11.2% to 12% of GDP, whereas it was expected to fall slightly. Government spending (% GDP) 12,5% 12,0% 11,5% 11,0% 10,5% 10,0% 9,5% 9,0% 1985 1990 1995 2000 2005 2010 2015 2020 1980 Spending as of 2019, GDP as of 2021 Forecast of December 2019 Forecast of March 2021 This increase in the share of GDP is explained by the increase in spending discussed above, but only in part. The sharp decline in GDP automatically implies that a given level of expenditure represents a higher share. This is illustrated by the green line that shows how the share of government spending would have evolved if it had remained constant but GDP had fallen as it did. We see that this mechanical effect explains most of the increase in 2020 (0.67% for a total increase of 0.88%). Expenditure itself only matters since 2021, when it increases as indicated above, while GDP returns to more normal values (the green line drops). In 2022, the share falls, due to a fall in spending and a rise in GDP. Although public spending will represent an unprecedented share of GDP in 2020-2021, this is a temporary development and the share should return to more usual values from 2022, remaining in line with the values observed for more than 30 years. In view of this temporary increase in the weight of the state, and the gradual recovery of private activity, Switzerland can fully afford a serene adjustment of public spending. There is no need to rush into action, and this could have a negative impact on private activity.

Consumption Government s 400 88 390 86 380 84 370 82 360 80 350 78 340 76 74 330 72 2015 2016 2017 2018 2019 2020 2021 2022 70 2015 2016 2017 2018 20 Final demand Expor 670 480 460 650 440 630 420 400 610 380 590 360 340 570 320 550 300 2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 20 : Forecast of December 2019 : Forecast of March 2021

spending Investment 019 2020 2021 2022 200 195 190 185 180 175 170 165 160 2015 2016 2017 2018 2019 2020 2021 2022 rts Imports 019 2020 2021 2022 360 340 320 300 280 260 240 220 200 2015 2016 2017 2018 2019 2020 2021 2022