CIO Market Outlook 2023: Switzerland escapes recession thanks to high net immigration

Global economic growth will continue to slow in 2023, according to the market outlook from the CIO Office of Zürcher Kantonalbank. Clear regional differences can be seen: while the euro zone, the UK and some emerging markets are already in the midst of a mild recession, the situation in Switzerland is likely to be limited to a slowdown in growth. The US is currently still stagnating, and the extent to which a recession can still be averted will only become clear during the course of the next year. China will grow below its potential.

Overall, a mild global recession can be expected, with a manageable slowdown in the real economy. This is thanks to a robust labour market, the fading but still present catch-up effect in services consumption, and healthy corporate balance sheets. The chances of a global recovery should increase again from mid-2023. However, even a sharper recession would not be a disaster. “After more than a decade of being in the Goldilocks zone – moderate growth and inflation as well as low interest rates – a cleansing thunderstorm would reinvigorate the business cycle like an electric shock and give new impetus to the economic cycle,” says Christoph Schenk, Chief Investment Officer at Zürcher Kantonalbank.

Inflation in Switzerland to rise again at the beginning of 2023

The Swiss economy has lost momentum in recent months and the outlook remains gloomy – partly due to the strained energy situation and higher rates of inflation. Furthermore, the high price fluctuations in the European Union and the more restrictive monetary policy around the world are having a strong dampening effect on global economic activity, and as a result on Swiss exports.

Nevertheless, the CIO Office of Zürcher Kantonalbank does not expect a recession in Switzerland in the coming year and is forecasting average GDP growth of 1%. With regard to the energy situation, the outlook is currently optimistic. The structural conditions of the Swiss economy mean that Switzerland is likely to cope with the potential energy crisis better than nearby countries.

Another important reason for the sustained growth is the high level of net immigration. Since autumn 2021 gross monthly immigration has picked up significantly while emigration has remained constant. This year net migration is likely to be higher than it has been for a number of years, and there are no signs of trends reversing in 2023 either. Despite the pandemic, the improved economic situation compared with nearby countries has once again increased people’s willingness to migrate for work. The population in Switzerland is growing by leaps and bounds due to the war in Ukraine and the high demand for labour. This is acting as a boost to private consumption. “As is familiar from previous downturns, population growth in 2023 will again be at least as high as economic growth. Per-capita growth therefore is stagnant”, says Dr David Marmet, Chief Economist Switzerland at Zürcher Kantonalbank. The number of unemployed will increase slightly again in 2023 due to the challenging economic environment. Meanwhile, a shortage of skilled workers remains a problem for many companies, meaning that unemployment will not rise above 2.5%.

The decline in inflation in autumn 2022 gave rise to hopes that price increases were already a thing of the past, but inflation is expected to rise again as soon as the beginning of the year. For example, the higher electricity prices announced by the Federal Electricity Commission in autumn 2022 will push up the national consumer price index by at least 0.5 percentage points in January 2023. Higher rents will also be reflected in the consumer price index, not least due to the higher reference interest rate. In addition to this, surveys suggest that Swiss companies intend to raise their end prices in the next few months. Zürcher Kantonalbank expects an average inflation rate of 2.2% in Switzerland this coming year.

Swiss franc no longer overvalued

Weakening business trends will prevent a wage-price spiral in Switzerland. Nevertheless, inflation will not settle in the stable range without intervention from the Swiss National Bank (SNB). Accordingly, interest rates in Switzerland will continue to rise in 2023, albeit at a more leisurely pace.

Thanks to the comparatively solid economy, the Swiss franc remains attractive and should not be seen as overvalued due to inflation being relatively low compared with other countries. As soon as the global economic recovery resumes, safe havens such as the Swiss franc and the USD will take a back seat. 

Inflation is here to stay

CIO experts at Zürcher Kantonalbank expect global inflation to decline over the next year but remain above historical levels. They forecast average inflation of 5.5% for the euro zone and 4% for the US.

Central banks will therefore not fundamentally change their monetary policy even if inflationary pressures decline. However, this means they increase the risk of slowing the economy more than intended. After all, the inflation being reported is always a glance in the rear-view mirror and says nothing about future growth potential. Monetary policy measures always have a delayed effect on the real economy.

The CIO Office believes the most likely scenario is that central banks will take an extended pause on interest rates – but without cutting rates – starting in the second quarter of 2023. This is assuming that the economy does not stall and there is no significant change in the current geopolitical tensions. However, an interest rate pause is not an all-clear for economic growth. Real household income has shrunk due to inflation and will have a negative impact on consumption in H1 – with financing conditions remaining expensive.

Four reasons for structurally higher inflation

Higher underlying inflation is here to stay. This is due to four medium to long-term structural developments that can be summarised as “4D”:

1. Deglobalisation: Global trade relations have cooled as a result of supply bottlenecks during the pandemic, the war in Ukraine, and the trade conflict between the US and China which has been ongoing for some time. This makes the movement of goods and services more expensive.
2. Decarbonisation: Decarbonisation leads to higher spending on short-term energy supply alternatives and on faster development of renewable energy infrastructure.
3. Defence: As a result of the war in Ukraine defence spending around the world will increase, especially in Europe. Alongside the development of energy supply infrastructure this leads to capital-intensive investment, which drives up the prices of capital goods.
4. Demographics: The qualified staff needed to carry out all these projects are currently lacking, due to the ageing workforce. This is driving the wage-price spiral.

The return of bonds

The effects of high inflation and tighter monetary policy as well as geopolitical uncertainties will continue to shape developments on the financial markets in 2023. The correction of prices due to rising interest rate expectations is already well under way, and has led to a major shift in the relative attractiveness of asset classes. “Bonds are a real alternative again,” says Manuel Ferreira, chief strategist at Zürcher Kantonalbank. “Monetary tightening has a delayed effect on the economy and on corporate profits. If the focus in 2022 was on digesting interest rate expectations, the emphasis in 2023 is on declining corporate profit expectations.” The decisive factor here is that central banks are no longer looking backwards when it comes to inflation and are curbing the pace of key interest rate hikes.

For the main asset classes of bonds and equities, this means that yields, which had already risen in the run-up to the interest rate hikes, will trend sideways or downwards. For equities, Zürcher Kantonalbank expects corporate margins to shrink due to higher production costs and lower sales.

A mild recession with increased inflation – the most likely scenario according to Zürcher Kantonalbank – represents a challenging environment for investors. This is because while a lukewarm real economy fuels asset prices, an environment with a cool real economy and overheated prices leads to highly volatile financial markets. Alternatively, a short, more visible recession could have the more effective impact of reviving financial markets and giving new impetus to the economic cycle – which may be painful in the short term, but would have a cleansing effect.