KOF Economic Forecast, Winter 2025: Despite Trade Deal, Gloomy Outlook for the Swiss Economy

The upward revision for the coming years is driven primarily by the easing of trade policy tensions, which reduces US tariffs on Swiss exports from 39% to 15%. The positive effect of the reduced tariffs is partly offset by the deterioration in the international outlook.

Switzerland’s economic outlook has stabilised towards the end of the year. A key contributing factor has been the easing of trade tensions with the United States, after Switzerland succeeded in mid-November in negotiating a reduction of the tariffs introduced in August from 39% to 15%. However, uncertainty remains high, as the mutual declaration of intent does not yet constitute a legally binding agreement.

The outlook for the international environment has slightly deteriorated compared with the previous forecast. In the euro area, growth remained weak in the third quarter, and in Germany in particular, positive impulses from fiscal measures are expected to materialise with increasing delay. In the United States, weakening consumer sentiment, soft labour market data, and the most recent government shutdown all point to a cyclical slowdown.

Rebound effects shape foreign trade

While exports of watches, machinery, and electrical engineering suffered from the higher tariffs over the course of the year, the pharmaceutical sector has so far recorded substantial increases in exports to the United States. Overall, however, the negative tariff effects turned out to be smaller than previously assumed. Nevertheless, the outlook for exports to the US remains subdued due to the tariffs still in place and the economic slowdown there.

Persistently weak demand from China and increasing efforts to promote domestic production further weigh on export developments, particularly in industries sensitive to the business cycle. These losses are partially offset by more robust demand from Europe. Rebound effects following the pronounced front-loading of exports led to a sharper decline in goods exports – especially in pharmaceuticals – than expected, while goods imports proved overall more resilient.

Outlook for the domestic economy remains subdued

Investment activity continues to be characterised by restraint. Equipment investment has recently stagnated and remains below the level of the previous year. Only with a gradual normalisation of political and economic conditions is investment dynamics expected to pick up again.

Weakness also persists in the construction sector. The ongoing downturn in residential construction, combined with the cyclical weakness in industrial and commercial building investment, has weighed on overall construction investment. Only a gradual recovery is expected over the forecast horizon.

By contrast, private consumption remains a reliable pillar of the economy. Consumer spending recently grew at a solid pace, supported by low inflation and positive nominal wage increases, which strengthen real incomes. Although the labour market is likely to recover only slowly, consumption dynamics remain broad-based.

Public consumption, however, is developing much more sluggishly. Fiscal constraints at the federal and cantonal levels, as well as the consolidation programme taking effect from 2027 onwards, limit the room for manoeuvre, implying that government consumption will increase only moderately later in the forecast period.

Weak phase in the labour market continues

The Swiss labour market has weakened further. The unemployment rate has continued to rise, while employment has declined for the second consecutive quarter. Leading indicators show no signs of a trend reversal, and the number of job vacancies remains low.

Although firms’ employment expectations have improved slightly, they remain subdued and point to continued weak employment growth for the time being. The unemployment rate is expected to rise slightly further and reach 3.1%. Wage growth is expected to slow somewhat, but thanks to low inflation, real wage gains should still be achievable.

Inflation lower than expected – SNB maintains policy rate at 0%

Inflation expectations have been revised downward relative to the previous forecast. In particular, the development of rental prices turned out to be weaker than expected. For 2026, the KOF Institute expects an inflation rate of 0.3%, followed by a moderate increase to 0.6% in 2027.

The appreciation of the Swiss franc and falling energy prices exert disinflationary effects over the forecast horizon, while rent developments remain subdued due to the lower reference interest rate. The KOF Institute assumes that the SNB will maintain its policy rate at 0% throughout the entire forecast period.

Uncertainty surrounding the tariff deal and geopolitical risks predominate

Forecast risks remain high and predominantly tilted to the downside. It remains unclear to what extent the Swiss investments pledged in the United States could lead to relocation effects and dampen domestic investment activity. The pharmaceutical sector also faces risks should the US government enforce price reductions for pharmaceutical products.

Internationally, risks arise from possible escalations of trade conflicts, geopolitical tensions, and potential disruptions to global supply chains. Moreover, high public debt levels in many economies increase the risk of fiscal consolidations and financial market turmoil. A further appreciation of the Swiss franc would additionally burden the competitiveness of Swiss exporters.

Conversely, upside risks include a rapid easing of geopolitical tensions, a faster-than-expected decline in inflationary pressures abroad, or a quicker and more effective implementation of fiscal stimulus measures in Europe – particularly in Germany.