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Switzerland as an island of stability

In its quarterly forecasts, the KOF Swiss Economic Institute of ETH Zurich is expecting GDP to rise by 1.4% by the end of the year.

Switzerland as an island of stability
In an interview, Prof. Jan-Egbert Sturm, Director of the KOF Swiss Economic Institute of ETH, explains what these forecasts are based on and which other countries could rival Switzerland in terms of stability. He also provides an insight into what being an economic researcher actually entails and identifies the most important trends facing Switzerland as a place of business, both now and in the future.

Professor Sturm, why do we even need business cycle research?

Well, you could also ask why we predict the weather. Human beings have a fundamental need to know what to expect so that they can prepare for it as well as possible. The same holds true for companies or public institutions. They, too, want to get a feel for what the future holds, both in the long and short term, so that they can adjust their budgets accordingly, for instance. And of course, even if these predictions aren’t 100% certain, they still provide a basis for making plans.

Which methodology do you use for your forecasts?

A distinction needs to be made between short-term and long-term forecasts. Long-term forecasts are strongly based on theories while short-term forecasts are extremely data-centric. When it comes to the latter of the two, it’s often enough to simply take certain indicators into consideration. Here's a simple example: If the number of construction permits suddenly rises, it’s very likely that construction activity will also intensify within a short period of time. Long-term forecasts, on the other hand, are more strongly based on theories. We not only consult the principles of economics for our analytical models but take past situations into consideration, as well, and use those as a starting point for formulating our statements. The world is so complex, however, that every model is inevitably an extremely simplified version of reality. Plus, since the past never stands still, we have to make ongoing adjustments to our analytical models. So, contrary to popular belief, when we’re drawing up our quarterly forecasts, we can’t just have the analysis performed at the push of a button.

One of your recently formulated forecasts predicts that Switzerland’s GDP will rise by 1.4% this year – despite the recession in the eurozone. What is this forecast based on?

With Europe and the rest of the world in the midst of a phase of uncertainty, Switzerland represents an island of stability. This stability ensures that private consumption remains steady in our country. We also continue to have a high rate of immigration: Because things are going so well, we need skilled workers from abroad who then stimulate consumption in turn. Looking at it that way, we have a self-reinforcing loop.

Despite the positive forecasts, what are some of the current unknowns that could hinder the growth of Switzerland’s economy?

From an economic perspective, two factors stand at the forefront: There's the Chinese economy for one, which has seen rather disappointing performance recently. If that continues, we have to expect some negative repercussions. Europe is the second unknown. At the moment, nobody can say how the political situation will develop. Historically speaking, we are in a unique situation, which means that we cannot simply draw conclusions from past events. While a certain amount of calm has returned at present, this is mainly attributable to the fact that elections are around the corner in Germany and any statements being made are relatively cautious. My hypothesis is that unrest could pick up again this autumn or winter. For us that means that we can only observe and then react to whatever happens – come what may.

So on the one hand, we have positive forecasts for Switzerland and, on the other, we have uncertainty in Europe. What impact does this have on the overall mood of the Swiss economy?

We regularly survey a panel of 12,000 Swiss companies in terms of their economic conditions. These surveys reveal that while the mood in Switzerland isn't euphoric on the whole, it isn't bad, either. There are, however, enormous differences between the individual sectors. While there might be a boom in the construction sector and personal services, which also includes the healthcare sector, the export-based industrial sector is having greater difficulties, particularly in light of increased competition and the strong Swiss franc. Put more simply, sectors that focus on the domestic market are doing well. Industries dependent on the European or global economy, on the other hand, are experiencing greater difficulties.

Are there any countries with economic forecasts that are as good as Switzerland’s?

Yes, Canada and Australia have also mastered the economic crisis quite well and several countries in Asia are on track toward growth. Luxembourg and Austria are performing well within Europe. Nevertheless, our strong financial center and the fact that we are not a member of the EU put us in somewhat of a special position, which means that it is impossible to make direct comparisons between those countries and Switzerland.

One last question: Which are the most important trends in Switzerland?

One is certainly the growing population which is providing for a robust domestic economy at the moment. It’s also obvious, however, that population growth goes hand in hand with social tension, something that the political world in particular still needs to learn how to handle.

Issues related to energy policy play a leading role, as well: Where will Switzerland’s journey take it? Is it possible to address the concerns and wishes which exist at the political and social level and, if so, at what cost?
Social security insurance is another issue that will keep us extremely busy. The elderly are outnumbering young people to an ever greater degree and that is having a direct impact on our retirement system. Last but not least, the financial industry will continue its transformation and that development must be monitored precisely.
All of these processes have a strong impact on our economy and ultimately influence Switzerland as a place of business. As you can tell there's always something exciting going on – we never run out of research topics.

Interview by S. Hefti, Media Relations
KPMG Switzerland

Mardi 3 Septembre 2013

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