What big economies can learn from small economies
The author is Head of Global Economics and Research at Credit Suisse
In the wake of the coronavirus pandemic, U.S. policymakers and companies looking to prepare for a more sustainable future may want to look at the success of a smaller developed country — Switzerland.
Despite a $706 billion economy and a population of just 8.7 million, Switzerland often tops the charts for innovation, competitiveness and quality of life. It is also the richest country in the world in terms of wealth per adult. Its public sector is lean, with public debt at just 43 percent of GDP. Institutional and physical infrastructure is strong.
Switzerland’s record in dealing with Covid-19 is no better or worse than elsewhere. It recently reported 2,468 new cases per million people per day, with 67.2% of its total population fully vaccinated. By comparison, the United States has 1,994 cases per million people, a vaccination rate of 62%. But whether Covid-19 is prevalent or not, its economic record and prospects for the next few years appear bright. The reasons for this success are equally important to large and small countries.
First, Switzerland has a high percentage of “teleworking” activity. During the pandemic, 34.1% of employees are working remotely at least occasionally, and industries such as information technology (76.3%), finance (61.4%) and education (54.7%) have even higher shares in 2020.
This has allowed the country to take a pragmatic and generally less draconian approach to containing the virus, with the result that its economy will contract less than others in 2020 and rebound more quickly in 2021. In fact, by the end of last year, the Swiss labor market had overcome the shock of the Covid-19 pandemic, with the unemployment rate very close to pre-pandemic levels of just 2.4%. Swiss companies have full orders and consumer confidence is strong, with GDP expected to grow by 2.5% in 2022, above pre-pandemic levels.
In the U.S. and elsewhere, enabling more remote work appears to be an important prerequisite for increased labor market participation. This will be popular with workers and families who can move to safe and affordable places to live while reducing congestion in metropolitan areas.
Second, Switzerland benefits from thoughtful and sensible fiscal policy. While the government is highly supportive of industries negatively impacted by the outbreak – especially tourism, hospitality and personal services – the government has retained some of its fiscal firepower. The budget deficit is only -2.2% in 2020 and -2% in 2021, compared to -12.4% in the US in 2021.
This reduces government debt to 42.7% The share of GDP in 2021 is 133% compared to 133% in the US, which means the economy is not overheating, although it still faces supply chain and delivery difficulties experienced by other developed countries.
As a result, the inflation rate 0.6% In 2021, it is expected to remain comfortably within the SNB’s price stability range throughout 2022.In fact, the central bank does not have to raise interest rates, and Fed This must now be done to restore price stability and maintain credibility.
The last important factor in Switzerland’s success is its energy policy, which focuses on ensuring grid resilience. The country is fortunate to be short of fossil fuels but rich in water. As a result, 55% of its domestic electricity production is hydraulic. Importantly, however, Switzerland also maintains a 35% share of nuclear power generation, and an additional 5% from other renewable sources. The risk of an energy crisis is manageable in Switzerland.
Elsewhere in Europe and the US, the risk is even greater. Here, rethinking the optimal energy mix to maintain stable and competitive electricity prices should be the top priority.
Another way to ensure a resilient and financially sustainable future is to avoid stimulus boom and bust cycles followed by austerity. Switzerland’s record in this regard is reflected in the Swiss franc’s status as a safe-haven currency. This means that sometimes the franc is overvalued in times of crisis, requiring the Swiss National Bank to intervene in currency markets. But it has also led to a more benign inflation outlook in Switzerland than in many countries.
As a result, the Swiss National Bank can now maintain its very expansionary monetary policy and allow the Swiss franc to appreciate against the euro. This means that Swiss yields should remain low, providing attractive conditions for Swiss companies to invest, innovate and maintain a competitive edge.