The KOF forecasts for the current year an increase in real gross domestic product (GDP) adjusted for sporting events of 1.2% (1.6% including them).
For 2025, it forecasts growth adjusted for sporting events of 1.8% (1.4% including them). The KOF’s economic outlook therefore remains virtually unchanged compared to the spring forecasts.
Improvement in the situation on European sales markets – The Swiss economy is on the rise
According to KOF economic forecasts, the Swiss economy is expected to recover from the second half of 2024. The recent below-average economic development in important European markets such as Germany, France and Italy had recently slowed down the part of the Swiss economy oriented towards exports. According to KOF forecasts, however, this situation is expected to improve thanks to increased consumer spending and investments in these economies, which will also provide a boost to the Swiss export economy. Thus, increased export dynamics are expected for 2024, with growth in exports of goods and services (without valuables) of 2.9% and 2.7% in 2025.
Value added in the manufacturing industry is growing again
The expected recovery in European countries should have the consequence that the division of the Swiss economy between export-oriented branches and domestic-oriented service sectors will be less marked in the next half-year than recently. Overall, value creation in the manufacturing industry, for example, is expected to grow again after quarters that have been weak recently.
Job creation in the labor market continues but is losing momentum
The Swiss job market continued to show solid growth in the first quarter of 2024, which was mainly driven by the services sector. Important leading labor market indicators now indicate slowing labor market dynamics. Thus, the Swiss labor market, which had experienced very strong job creation over the last three years, is not expected to continue to the same extent. Nonetheless, due to solid GDP growth, KOF expects employment and labor force growth to remain robust for the forecast period. After growth of 2% (employment) and 2.3% (activity) in 2023, this year results in rates of 1.5% and 1.2%. In 2025, employment growth should be 1.2% and that of the working population 1.4%.
Lower inflation relieves the Swiss economy
Inflation in Switzerland will be lower in 2024 than previously forecast. April and May figures for the Swiss Consumer Price Index (CPI) were lower than expected, indicating smaller secondary effects of inflation. The impact of the increase in the reference interest rate on rents for existing housing remains moderate. The KOF therefore revised its inflation forecast for 2024 by 0.3 percentage points downwards, to 1.3%. The inflation forecast for 2025 was also lowered slightly to 1.0%. This development suggests higher wage increases in real terms, which should compensate for the real wage loss of the last two years. Concerning AVS average salaries, real salary growth is 0.7% this year. The KOF forecasts an even higher real wage growth of 0.9% next year.
KOF expects further interest rate cuts in Switzerland, but not in the USA for the moment
The KOF expects that the Swiss National Bank (SNB), taking into account the favorable inflationary environment, will carry out its next interest rate hike again in June and lower its key rate to 1.25%. In addition, KOF expects, during the forecast period, a further rate hike of 25 basis points next March. In the United States, the US central bank (Fed) is battling inflation rates above 3%, which rules out any rate cuts in the near future if the labor market is robust. KOF expects the Fed to only cut its key rates in November. For the current year, the KOF forecasts three further rate cuts in the European monetary area and two in the American monetary area.
A new escalation of geopolitical conflicts remains a major factor of uncertainty
The forecast is subject to both positive and negative risks. One of the main downside risks is larger-than-expected side effects from continued high inflation in the eurozone and the United States, which could make it more difficult to reduce core inflation. This could force the European Central Bank (ECB) and the Fed to refrain from lowering interest rates for a longer period, which would slow economic development in these important sales regions. Geopolitical conflicts, such as widening wars in Ukraine and the Middle East, could drive up energy prices and strengthen the Swiss franc, reducing the propensity of companies to invest. Moreover, increased government spending on military and armaments, without a corresponding increase in revenue, has continued to strain the national budgets of many developed countries, increasing the risk of a sovereign debt crisis.
On the positive side, a stronger-than-expected fall in inflation in the United States and the Eurozone could boost purchasing power and private consumption. Robust figures for fixed capital investment in major European economies could be harbingers of a stronger economic recovery in Europe than currently expected.
