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Country Analysis – SWITZERLAND Index 1. GDP and main production 2. Aggregate Demand (C + I + G + NX) 3. Current Situations 4. Past Situations. 1) GDP and main production The above chart shows the amount of GDP of Switzerland from 2006 to 2014. In general, it shows a gradual increase for almost 10 years. However, it hesitated to rise in 2010 and 2013. However, GDP growth of Switzerland is forecasted by economists to slow down because of the revaluation of Swiss franc. Since the decision of the Swiss National Bank (SNB) taken on 15 January to abolish the exchange rate floor of 1.20 franc to 1 euro and the subsequent appreciation of the Swiss franc, the economic indicators for Switzerland have worsened. Nevertheless, although the appreciation of the Swiss currency will have a detrimental impact on the competitiveness of Swiss companies, the brighter economic prospects for Europe and the strengthening upturn in the USA should alleviate these negative effects. Seen from the today’s viewpoint Switzerland may experience a temporary economic slowdown. However, in the current environment there are no signs of any sharp downturn – with a marked fall in economic activity and sharp rise in unemployment. Consequently, growth in GDP for 2015 and 2016 is expected to be +0.9% and +1.8% respectively, with a slight increase in the unemployment rate. Although the economy will experience a moderate general slowdown, certain sectors or individual companies are currently faced with severe competitive pressures. The chief industry in Switzerland is mechanical and electrical engineering. This, coupled with a favorable location and climate for the summertime generation of power from rivers, has contributed to Switzerland becoming an important exporter of hydroelectricity. The hydropower sector in Switzerland is worth approximately 2 billion Swiss francs, which is close to $2.3 billion. Due to the Swiss specialization in precision engineering, towns and cities like Geneva, Neuchatel, Biel and Grenchen have also been closely associated with high-quality watch making for centuries. At one time, before Asian watch markets proliferated in the 1970s, Switzerland produced almost half of the world's watches as pioneers in the use of quartz crystals. Among its chemical industries are the Basel-based pharmaceutical giants, Novartis and Roche. Although both of these are multinational companies, Switzerland itself has a long tradition of chemicals and pharmaceuticals, having developed their manufacturing industry out of nineteenth-century dye-making. An overwhelming majority of Switzerland's industries, approximately 99.6 percent, are classified by the European Union as small and medium-sized enterprises, or SMEs. Switzerland has a mature market economy based on export oriented machine and electrical manufactures (high precision motors, generators, turbines, textile and tool machines, mills, watches and many innovative high-tech products) including automation equipment and engineering of whole power or industrial plants. The focus is on niche products with a high proportion of complex engineering but rather small series. chemicals (colors, fertilizers, pestizides) and pharmaceuticals financial services: international trade, insurance and banking tourism export of electrical energy, primarily peak power (winter days) produced by Switzerland's many hydroelectrical plants 2) Aggregate Demand (C + I + G + NX) Switzerland’s country size is small and it has limited natural resources. Therefore it must rely on import. Moreover, it has a small domestic market due to its 7-million population, which means export is important to them as well. Due to these limitations, trade is becoming a more crucial part of Switzerland’s economy. It can also be reflected in Switzerland’s GDP by composition. The proportion of export in its GDP has gradually increased throughout the years. In 2013, export took up more than 70% of the total GDP. Size of import has shown similar growth when measured in terms of % of GDP. Exports of goods and services (% of GDP) 80 60 40 20 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 On the other hand, proportion of domestic final consumption expenditure and gross investment expenditure in total GDP both experienced fluctuations but eventually decreased, while government expenditure, measured in % of GDP, is stable. Household final consumption expenditure, etc. (% of GDP) 65 60 55 50 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 45 Gross capital formation (% of GDP) 40 30 20 10 2012 2014 2012 2014 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 General government final consumption expenditure (% of GDP) 15 10 5 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 A large volume of trade also implies that its trading partners will easily affect the performance of Switzerland’s economy. Since United States and European countries have been the major trading partners of Switzerland, Switzerland’s GDP has shown a dependence on the performances of their economies. The economies of US and Europe have faced 3 major recessions throughout the last 30 years (in early 1990s, early 2000s and the recent 2008 recession). When we observe the annual % growth of Switzerland’s household consumption and import, we can find troughs of minimal or negative growth corresponding to these 3 periods. These indicate that economic recessions in Europe and US will also weaken domestic demand of Switzerland. Switzerland’s dependence on other economies is also proved. -5 10 5 0 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 2014 15 2014 (annual % growth) 2012 Imports of goods and services 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 -2 1980 Household final consumption expenditure, etc. (annual % growth) 4 2 0 3) Current situation of Switzerland and our policy recommendation Current Situation Switzerland’s economy is based on a highly qualified labour force performing highly skilled work. The main areas include microtechnology, tourism, banking and as well as insurance. The service sector now employs over half of the active population of Switzerland. Most of the people working in Switzerland are employed by small and medium-sized enterprises, which play an extremely important role in the Swiss economy. The Swiss are concerned that economic activity should have as little impact as possible on the environment. Switzerland's energy and transport policies aim to be environmentally friendly. However the age of unlimited economic growth in Switzerland is over. Fear of unemployment has been one of the main concerns of the Swiss for several years. Another situation that Switzerland is that Swiss National Bank (SNB) suddenly announced that it would no longer hold the Swiss franc at a fixed exchange rate with the euro, there was panic. The franc soared. One euro was worth 1.2 Swiss francs; at one point on Thursday its value had fallen to just 0.85 francs. A number of hedge funds across the world made big losses. The Swiss stockmarket collapsed. The question now is how much the removal of the cap will hurt the Swiss economy. The stockmarket fell because Swiss companies will now find it more difficult to sell their wares to European customers. UBS, a bank, downgraded its forecast for Swiss growth in 2015 from 1.8% to 0.5%. Switzerland will probably remain in deflation. But the SNB should not be lambasted for removing the cap. Rather, it should be criticised for adopting it in the first place. When central banks try to manipulate exchange rates, it almost always ends in tears. Policy Recommendation- Unemployment benefits If you become involuntarily unemployed, you are entitled to 70 per cent of the average earnings paid into your unemployment insurance in the previous six months. If you have a child or your daily allowance falls below a predetermined minimum, you are entitled to 80 per cent of the average earnings in the last six months. Unemployment benefit is allocated as a daily allowance covering five days per week. Entitlement begins after a waiting period of five days of proven unemployment. Unemployment benefits allows up to 400 daily allowances to be received in a two-year period. If you’re over 55 and have made unemployment insurance contributions for at least 18 months, you are permitted up to 520 daily allowances in the same period. In many cases, your employment office might allow you to take training courses or be allowed to benefit from other programmes while continuing to receive daily allowances. I think this policy can protect the laid-off workers, but I think the allowances are too high, over 70%, and the duration is too long. These reduce the incentives of unemployed workers to find a job immediately. 4) PAST situations over 20 years in Switzerland The economy of Switzerland is one of the world's most stable economies. Its policy of long-term monetary security and political stability has made Switzerland a safe haven for investors, creating an economy that is increasingly dependent on a steady tide of foreign investment. Because of the country's small size and high labor specialization, industry and trade are the keys to Switzerland's economic livelihood. Switzerland has achieved one of the highest per capita incomes in the world with low unemployment rates and a balanced budget. The service sector has also come to play a significant economic role. 19th century Switzerland as a federal state was established in 1848. Before that time, the citycantons of Zurich and Basel in particular began to develop economically based on industry and trade, while the rural regions of Switzerland remained poor and under-developed. While a workshop system had been in existence throughout the early modern period, the production of machines began in 1801 in St. Gallen, with the third generation of machines imported from Great Britain. But in Switzerland, hydraulic power was often used instead of steam-engines because of the country's topography while there are no significant deposits of coal. By 1814, hand weaving had been mostly replaced by the power loom. Both tourismand banking began to develop as an economic factor from about the same time. While Switzerland was primarily rural, the cities experienced an industrial revolution in the late 19th century, focused especially on textiles. In Basel, for example, textiles, including silk, were the leading industry. In 1888 women made up 44% of the wage earners. Nearly half the women worked in the textile mills, with household servants the second largest job category. The share of women in the workforce was higher between 1890 and 1910 than it was in the late 1960s and 1970s. Gotthard line in 1882 Railways played a major part in industrialization with the first railway appearing in 1847 between Zurich and Baden. Due to competition between private players, Switzerland was covered with more than 1000 km of track by 1860. 20th century The industrial sector began to grow in the mid-19th century, but Switzerland's emergence as one of the most prosperous nations in Europe, sometimes termed the "Swiss miracle" was a development of the short 20th century, among other things tied to the role of Switzerland during the World Wars. During World War I, Switzerland suffered an economic crisis. It was marked by a decrease in energy consumption, energy being mostly produced by coal in the 1910s, 1920s, 1930s and 1940s. The war tax was introduced. As imports were difficult, attempts were made to strengthen the Swiss economy. Switzerland's total energy consumption, which was dropping from the mid-1910s to the early 1920s, started increasing during the early 1920s. The same got stagnated during the 1930s before dropping again during the early 1940s before an exponential growth which started in the mid-1940s. In the 1940s, particularly during World War II the economy profited from the increased export and delivery of weapons to the German Reich, France, Great Britain, and other neighboring and close countries. However, Switzerland's energy consumption decreased rapidly. The conduct of the banks cooperating with the Nazis, but not exclusively, they also cooperated extensively with the British and French. and the commercial relations with the axis powers during the war became the subject of sharp criticism, resulting in a short period of international isolation of Switzerland from the world. After World War II, Switzerland's production facilities remained to a great extent undamaged which facilitated the country's swift economic resurgence In the 1950s, annual GDP growth averaged 5% and Switzerland's energy consumption doubled. Coal lost its rank as Switzerland's primary energy source, as other fossil fuels such as crude and refined oil and natural and refined gas imports increased. This decade also marked the transition from an industrial economy to a service economy. Since then the service sector has been growing faster than the agrarian and industrial sectors. In the 1960s, annual GDP growth averaged 4% and Switzerland's energy consumption doubled. By the end of the decade oil was Switzerland's primary energy source In the 1970s GDP growth rates gradually declined from a peak of 6.5% in 1970 until contracting 7.5% in 1975 and 1976. Switzerland became increasingly dependent on oil imported from its main supplier, the OPEC cartel. The 1973 international oil crisis caused Switzerland's energy consumption to decrease from 1973 to 1977. In 1974 there were three nationwide car-free Sundays when private transport was prohibited as a result of the oil supply shock. From 1977 onwards GDP grew, however Switzerland was also affected by the 1979 energy crisis which resulted in a short term decrease of Switzerland's energy consumption. In the 1980s, Switzerland was affected by the hike in oil prices which resulted in a decrease of energy consumption until 1982 when the economy contracted by 1.3%. From 1983 on both GDP and energy consumption grew. In the 1990s, Switzerland's economy was marred by slow growth, having the weakest economic growth in Western Europe. The economy was affected by a 3-year-recession from 1991 to 1993 when the economy contracted by 2%, which also became apparent in Switzerland's energy consumption and export growth rates. Switzerland's economy averaged no appreciable increase (only 0.6% annually) in gross domestic product (GDP). After having unemployment rates lower than 1% prior to 1990, the 3-year-recession also caused the unemployment rate to rise to its all-time-peak of 5.3% in 1997. And thus, as of 2008, Switzerland is at the second place among European countries with populations above one million in terms of nominal and purchasing power parity Gross Domestic Productper capita, behind Norway (see list). On numerous occasions in the 1990s real wages decreased since nominal wages couldn't keep up with inflation. However, beginning in 1997, a global resurgence in currency movement provided the necessary stimulus to the Swiss economy. It slowly gained momentum and peaked in the year 2000 with 3.7% growth in real terms. 2000s The labour productivity level of Switzerland is one of highest in Europe.OECD, 2012 In the early 2000s recession, being so closely linked to the economies of Western Europe and the United States, Switzerland was not able to escape the slowdown felt in these countries. After the worldwide stock market crashes in the wake of the 9/11 terrorism attacks there were more announcements of false enterprise statistics and exaggerated managers' wages. In 2001 the rate of growth dropped to 1.2%, to 0.4% in 2002 and in 2003 the real GDP contracted by 0.2%. That economic slowdown had a noticeable impact on the labour market. Many companies announced mass dismissals and thus the unemployment rate rose from its low of 1.9% in June 2000 to its peak of 3.9% in October 2004, although well below the European Union (EU) unemployment average of 8.9%. The consumer mood worsened and domestic consumption decreased The exports of goods and services in the EU and the USA decreased as a result of the Swiss Franc's appreciation in value which caused an increase in prices of exported goods and services. On the other hand Switzerland's tourism sector slumped and room occupation rates by foreign guests decreased. Besides that a deficit of market competition in many branches of Switzerland's economy persisted. On the 10.11.2002 the economics magazine Cash published 5 measures which political and economic factors were suggested to implement so that Switzerland would once again experience an economic revival: 1. Private consumption should be promoted with decent wage increases. In addition to that families with children should get discounts on their health insurances. 2. Switzerland's national bank should revive investments by lowering interest rates. Besides that monetary institutes should increasingly credit consumers and offer cheaper land zones which are to be built on. 3. Switzerland's national bank is asked to devalue the Swiss Franc, especially compared to the Euro. 4. The government should implement the anti-cyclical measure of increasing budget deficits. Government spending should increase in the infrastructural and educational sectors. Lowering taxes would make sense in order to promote private household consumption. 5. Flexible work schedules should be instituted, thus avoiding low demand dismissals. These measures were applied with successful results along with the government's policy of the Magical Hexagon which consists of full employment, social equality, economic growth, environmental quality, positive trade balance and price stability. The rebound which started in mid-2003 saw growth rate growth rate averaging 3% (2004 and 2005 saw a GDP growth of 2.5% and 2.6% respectively; for 2006 and 2007, the rate was 3.6%). In 2008, GDP growth was modest in the first half of the year while declining in the last two quarters. Because of the base effect, real growth came to 1.9%. While it contracted 1.9% in 2009, the economy started to pick up in Q3 and by the second quarter of 2010, it had surpassed its previous peak. Growth for 2010 stood at 2.6% The stock market collapse has deeply affected investment income earned abroad. This has translated to a substantial fall in the surplus of the current account balance. In 2006, Switzerland recorded a 15.1% per GDP surplus. It went down to 9.1% in 2007 and further dropped to 1.8% in 2008. It recovered in 2009 and 2010 with a surplus of 11.9% and 14.6% respectively. As of the first quarter 2010, Switzerland house prices are still edging up. This is a chart of trend of gross domestic product of Switzerland at market prices estimated by the Swiss Government with figures in millions of Swiss Francs. Gross Year Domestic Product US Dollar Exchange 1980 184,080 1.67 Francs 1985 244,421 2.43 Francs 1990 330,925 1.38 Francs 1995 373,599 1.18 Francs 2000 422,063 1.68 Francs 2005 463,799 1.24 Francs 2006 490,545 1.25 Francs 2007 521,068 1.20 Francs 2008 547,196 1.08 Francs 2009 535,282 1.09 Francs 2010 546,245 1.04 Francs 2011 659.3 0.75 Francs 2012 632.2 ... REFERENCES http://www.tradingeconomics.com/switzerland/gdp-growth http://www.seco.admin.ch/themen/00374/00375/00376/?lang=en http://www.globaltenders.com/economy-switzerland.htm http://motherearthtravel.com/switzerland/economy.htm http://www.theodora.com/wfb1990/switzerland/switzerland_economy.html