Economics Term Report
By; Abdul Rafay, Moiz Ahmed, Faraz Ali and Muhammad Hunain Iqbal Siddiqui
General Economic Position Of Switzerland
The economy of Switzerland is one of the world's most enduring economies. Its approach of long haul financial security and political dependability has made Switzerland a sheltered harbor for speculators, making an economy that is step by step reliant on an enduring tide of remote venture. Due to the nation's little size and high work specialization, industry and exchange are the keys to Switzerland's financial wage. Switzerland has accomplished one of the most noteworthy per capita wages on the planet with low unemployment rates and an adjusted spending plan. The administration division has likewise come to assume a noteworthy financial part.
Swiss unadjusted unemployment rate slightly increased to 3.3 percent in October of 2015 from 3.2 percent in the previous month and matching market expectations, as the number of jobseekers and unemployed went up. Yet, youth unemployment declined by 3.9 percent from a month earlier. Unemployment Rate in Switzerland averaged 3.33 percent from 1995 until 2015, reaching an all-time high of 5.40 percent in March of 1997 and a record low of 1.60 percent in November of 2000. Unemployment Rate in Switzerland is reported by the State Secretariat for Economic Affairs. Switzerland’s unemployment rate is still low in international comparison but the number of unemployed persons is creeping up and the unemployment rate has been rising.
Forecast of Swiss Economy
If the changes in the Swiss economy in the near future are taken into consideration then no major increase in the investment is expected in 2016 because of the low interest rates but due to the effective equity valuation the capital spending in the economy is expected to rise. Considering export, it is predicted that it will rise by 2 percent in 2016 due to the changes in the exchange rates.
Other than the capital spending the consumer spending in the future of Switzerland economy is going to fall due to the increase in the unemployment rate and also because of the reduction in the number of immigrant which were a great cause of the consumer spending for the last six years. But if this employment aspect is viewed with long term expectation then health care and social service sector is going to be the biggest source of employment in Switzerland by 2030, this forecast is done on the basis of a survey report which stated that current the ratio of employed and unemployed in these two sectors is 1:7 which is likely to turn the other way round by 2030.
The overall growth in the economy is also expected to fall by 2030 considering productivity as the biggest factor of the economic growth, due to the decreasing labor and restrictions on immigrants more production can’t be done. So, from 2.0 being the current growth rate it is supposed to fall down to 1.8 by 2020 and 1.6 by 2030. It can also go as low as 1 in the future of the Swiss economy. So, to continue increasing the growth rate the way it has been increasing in the recent few years, policies regarding labor incentives should be introduced through which more and more production will be done to attain the required level of production.
Swiss Economy during the financial crises (2007-2010)
In the second half of 2008 the Swiss Economy entered in a recession. With the increasing intensity of the global crises the world trade fell remarkably. Along with the contraction of Exports there was also a reduction in investments because the investors had lost confidence as the interest rates became low. As the flow of financial sector inflows became low in Switzerland its external position weakened and also its current account was adversely effected. Due to increase in unemployment in Switzerland households reduced their spending and therefore consumption contracted tremendously. As the recession deepened Switzerland's fiscal position worsened tremendously as the as the Swiss Governments budget moved from a surplus to a deficit because of the government spending money for the welfare of its people for example, unemployment benefits and minimum wages to support households.
As a result of increased unemployment and low investment confidence production fell which caused the GDP to decline tremendously during 2008.The beginning of the debt crises in Euro zoned countries changed the situation for the Swiss economy once again in 2008 and 2009.From the Graph we can see that real GDP of Switzerland decreased tragically to (-0.2%) overall. Due to the worldwide recession Switzerland had to face a reduction in global demand and this adversely effected its manufacturing and service industry like tourism hindering the Growth in GDP. Secondly the increased unemployment, the declining trends in exports and investment stopped the production cycle of the country. In 2009 GDP fell to $316.1 billion from a GDP of $321.9 billion in 2007.
In 2009 seasonally adjusted jobless rate climbed to 3.9% from 3.8%in June which as the highest jobless rate since September 2005.The Swiss companies reduced the number of workers instantly as they experienced the worst global recession causing exports to decrease and private consumption to stumble. The number of people out of work rose by 4,502 to 154,972 in July when adjusted for seasonal swings. The unadjusted jobless rate increased to 3.7 percent from 3.6 percent in the previous month and manufacturing shrank at the slowest pace. This phenomena definitely shows a contraction in the economy. In 2010 unemployment rose to 4.1% remaining at the highest level this decade showing a weakness in the job market and an increase in the number of job seekers.
The recession of 2008 caused the consumer prices in Switzerland to decrease by 1.4 % in September 2009.Inflation dropped quickly from the 15-year high of 3.1% hit last July = to a rate of -1.4% in 2009. The decrease in GDP growth rate and an increase in unemployment caused the price levels to fall. There was a decline in the prices of food, leisure activities and transportation. This was enough to offset a lower drop in cost of housing, accommodation and clothing. The decrease in the worldwide demand for goods and services caused the prices for oil products to drop by 34.2 percent on the year of 2009 in May. This decreased the cost of production of the Swiss firms and therefore the prices fell as inputs became cheaper.
The global financial crises that erupted in 2008 adversely effected Switzerland's foreign trade which caused it to experience a down turn in 2009 after decades of good trade. In 2009 imports and exports in their real terms fell to 2006 levels .Imports fell by 9.9% and exports fell by 14.3%.For exports, this was the largest fall recorded over one year since 1944 and, for imports, since 1975. As far as the trade surplus is concerned Switzerland’s trade surplus fell to SwF 20.3 billion in 2009. to SwF 19.5 billion for the first time since 2005 the 2008-2009 financial and economic crisis reinforced the trend towards trade and financial protectionism worldwide.
POLICIES OF SWITZERLAND GOVERNMENT FOR THE PERIOD 2008-2010
Like the other economies of the world Switzerland was also affected by the worldwide recession, though in recent years Switzerland has experienced high growth, low unemployment and modest inflation, with strong fiscal and external positions.it is because Switzerland is open to trade and financial relations with the rest of the world. The effect come through two ways the financial channel and the trade (demand for exports). The authorities have taken a practical approach in reducing the impact of the crisis on the economy, but more may be needed. The planned and approved federal measures made some ¾ percent of GDP in 2009.
Policy of increasing competition
This strategy, supplemented in 2008 by a chapter entitled "Natural resources in the external economic strategy" and in 2009 by a chapter entitled "The Principle of sustainability in foreign policy", is based on three sections. The first is to improve access to external markets and help to guarantee the introduction of a clear and practical set of international rules. The second is to improve Switzerland's competitiveness by making its national market more competitive, and the third is to assimilate the largest possible number of countries into the global economy by supporting the economic development of partner countries. The first of these goals is to ensure that Swiss suppliers have easy access to markets worldwide. In order to achieve this, obstacles to across border trade such as customs, or non-tariff barriers such as quotas must be removed.
Policies to improve trade
Because international trade has historically played an important role in developing Switzerland's economy, the Government remains deeply devoted to an open multilateral trading system. According to it, multilateralism is the best way of ensuring free trade and protecting economic agents. As well as the 1972 Free Trade Agreement, Switzerland has signed Joint Agreements 1 and 2 with the EU, which cover a great number of areas, specifically, free movement of persons, air and land transport, agriculture, training and research, technical barriers to trade, , cooperation in matters relating to justice, the police etc. Since 2009, Switzerland and the EU have also contracted agreements on customs facilitation and security, education, recognition of protected designations of origin (PDO) and protected geographical indications (PGI), with the European Defense Agency. The Free Trade Agreement with the Faroe Islands and the Free Trade and Economic Partnership Agreement signed with Japan in 2009, Switzerland has a system of 24 free trade agreements settled under the EFTA framework
STUCTURAL REFORMS
If Switzerland appears both competitive and wealthy, this is above all due to strong contribution by the labor force (82.5% in 2011) rather than a high level (US$48 per hour in purchasing power parity in 2010) or growth in productivity (-0.5% yearly between 2008 and 2011). A number of structural reforms have been introduced in recent years, at both the internal and the external levels, to supplement and reinforce the growth policy. The combination of broader frankness to the outside, the introduction of free movement of persons within the EU and EFTA and the reforms of the domestic market have helped to enhance competition at the domestic level, while at the same time making exports more competitive
Since the strength of the Swiss franc is a problem that affects the whole of the economy, it must be tackled not only by the SNB and its monetary devices but also by the government and its fiscal policy.
Policies to control financial crisis
On 3 rd. august 2011 the Swiss national bank started taking liquidity measures against the overrated Swiss franc. It announced that it would lower the target range of three month rate of interest to 0%-0.25% and aim for a three-month rate close to 0%. Also, it announced that it wanted to raise the sight deposits of domestic banks at the SNB from CHF 30 billion to CHF 80 billion. This limit was continuously stretched during the subsequent weeks until sight deposits were eventually more than CHF 250bn.The Swiss national bank used a number of instruments such as foreign exchange swaps to provide the financial market of Swiss franc with liquidity. The M3 money supply increased by about CHF 35bn exclusively in the period from January to August 2011. On 6 September, the SNB fixed a minimum rate of CHF 1.20 to the euro. SNB did understand that it was essential to control the supply of money in the market thus it issued Insurance of SNB Bills. These bills were first issued on October 2008 and its only purpose was to cancel the large amounts of liquidity in case the money market is over supplied. The SNB said that it aimed for a continued weakening of the Swiss franc and that it is ready to purchase foreign exchange in infinite quantities. If the economic position and deflationary hazards request it, the SNB will take further actions.
Conclusions
Even at the present rate, Switzerland had done its task ahead of the crisis, making its economy right for the good and the worse times. And in two giant steps in the past six years, the Swiss opened their labor market to their neighbors from the European Union. Swiss firms can now draw on a huge collection of highly qualified workers from France and Germany, from Poland and the Czech Republic. With a few smart works, the Swiss thus raised the average rate at which their economy can expand throughout the series from less than 1.5 percent to at least 2 percent now. Strong tax revenues and a robust budget surplus are among the concrete rewards for such virtue.