The economic impact of Covid-19 in Switzerland

Covid-19 and the measures taken to combat it have a dramatic effect on Switzerland’s economy. The pandemic will cost between March and June, CHF 32 billion. This figure was estimated by the Swiss Economic Institute of ETH Zurich (KOF). According to the KOF, the six-week confinement costs amount to CHF 18 billion.

Estimates suggest that two-thirds of the costs come from the collapse of the global economy and one-third are the direct result of containment measures, such as shop closures and restrictions on people’s mobility.

On Thursday, SECO (the State Secretariat for Economic Affairs) outlined the Swiss scenario for GDP and unemployment rates. The scenario is truly dramatic.

Experts have predicted the worst economic recession since the 1975 oil crisis.

Eric Scheidegger, the head of SECO’s Economic Policy Directorate, explained that Switzerland is dealing with a combination of factors unique in history: a collapse in economic activity but also in household consumption. Moreover, this same situation is happening in parallel in most other countries of the world, particularly in the Confederation’s main trading partners.

In figures, the decline for the Swiss economy in 2020 will be 6.7% compared to a forecast of 1.5% made in March.

The SECO forecast is even more frightening than the one made by BAK Economics Institute, a think tank based in Basel, which at the end of March had calculated a 2.5% drop in GDP for 2020.

The downward trend is also expected for 2021 when a 5.2% increase in GDP will not recover the losses of the previous year.

In addition, the increase of public debt in many countries and the further disruption of financial markets as well as the Swiss real estate sector could also exacerbate the risks of further losses. Switzerland is also strongly affected by the decision to postpone the 2020 Olympic Games and other major sporting events, as there are many sporting associations in the country.

Other important data forecast by SECO concern unemployment rates.

For 2020, the average annual unemployment rate would be 3.9% instead of 2.8% as predicted last month, while in 2021, people unemployed could reach 4.1%.

If we compare these figures with international figures, they are relatively good, but they should not be misleading. This is a very fast growth, in fact, the February figures recorded an unemployment rate of 2.5%.

In recent days, UBS economists have conducted a study on the effects of COVID-19 on the Swiss economy.

The recession caused by the coronavirus pandemic will hit the whole of Switzerland, but will be different from one region to another.

The Arc jurassien, eastern Switzerland and mountain regions will be the regions most affected by the economic crisis.

The bank’s experts, like many of their colleagues, predict the biggest losses in regions heavily dependent on tourism. Compared to last year, the total gross value added in this sector is expected to decrease by at least 35%.

Other branches under pressure will be those related to the world of watchmaking, entertainment and personal services. The industry should be better able to withstand the crisis, even if it will feel the consequences of the economic situation.

At regional level, developments will depend mainly on the importance of the various economic sectors in the local economy.

In the Arc jurassien and particularly in the cantons of Neuchâtel, Jura and Solothurn, but also in the Canton of Vaud, more than half of the jobs are in high-risk branches, such as watchmaking. In Eastern Switzerland, the strongest declines will probably be in areas where many jobs are connected to industry.

The almost paralysis of tourism, on the other hand, will mainly affect Graubünden, Valais, Ticino, Mendrisiotto, which appears more exposed than other areas, followed by Locarno.

According to the UBS economists’ study, large cities such as Zurich, Basel and Bern, where the proportion of jobs in the most exposed sectors is lower, will be less affected. Basel, for example, will remain attractive for pharmaceutical jobs, while Berne will remain attractive because of its administrative importance.

In response to the crisis, Switzerland launched its largest economic aid package ever, providing CHF 62 billion to companies with government-backed bank loans and support for its short-term working programme.

From this CHF 62 billion, CHF 41 billion are for guaranteed loans for small and medium-sized enterprises (SMEs) in economic difficulty.

The aim of the plan is to assist SMEs with loans to enable companies with cash flow problems to cover their current costs for about three months.

SMEs have quick and unbureaucratic access to bank loans and thus cash to support the short-term effects of COVID-19.

Only SMEs can obtain loans under the state-guarantee loan programme. Companies with a turnover of more than CHF 500 million in 2019 cannot apply for a loan under the state-guaranteed loan programme.

The amount of the loan is calculated on the annual turnover of a company and may not exceed 10% of this.

For new companies and start-ups, an estimated turnover is used to calculate the loan amount.  The limit for a loan is CHF 20 million.

CHF 8 billion has been made available by the Swiss government for the partial unemployment allowance.

In this situation, Christian Levrat, the president of the Swiss Social Democratic Party, has proposed a solution to recover the losses: “a solidarity tax”.

According to Christian Levrat, higher incomes should be liable to an additional 10% federal tax for a certain period of time. Only people with a taxable income of over CHF 300,000 should pay, according to his proposal.

At the moment the maximum tax rate imposed on the highest Swiss earnings is 11.5%, so according to Christian Levrat’s ideas, the richest people should pay 21.5% of their income to cover the costs of the pandemic. This proposal will almost certainly not be taken into consideration, given Switzerland’s economic history.

Although the COVID-19 pandemic has an unprecedented impact on the history of Swiss finances, Switzerland’s low public debt puts the country in a solid financial position. In fact, as the Federal Finance Administration (FFA) states, the debt brake is designed for flexibility in exceptional situations (severe recessions, acts of war, natural disasters and pandemics) and thus allows considerable additional expenditure.

By:  Michele Brunori