'i R C'H') VEJj*!* :« OECD ECONOMIC SURVEYS SWITZERLAND MARCH 1975 BASIC STATISTICS OF SWITZERLAND THE LAND Area(I 000sq.km.) 41.3 Majorcities. 1973mid-yearestimates Cultivated land,grasslandandpastures (1000inhabitants): (1000sq.km.,in 1972) 20.2 Zurich 410.1 Forest(1000sq.km.,in 1972) 10.5 Basle 204.9 Geneva 168.6 Bern 157.7 THE PEOPLE Population, 1973average,estimates Numberofforeignworkerssubjectto (1OO0) 6431 control(1 000): No.ofpersonspersq.km. 156 April 1974 525.3 Netannualrateofpopulationincrease August 1974 551.3 (per 1 000inhabitants, 1968-1972) 9.0 Annualaverageincreaseinthenumber Labourforce, 1973 (1000) 3097 offoreignworkerssubjecttocontrol, Percentagedistribution,secretariatestim¬ Augustcensus(1000): ates: 1956-1964 50.0 Agriculture 7.3 1965-1974 -17.0 Industryandconstruction 46.2 Other 46.5 PRODUCTION GrotsNationalProductin 1973 Valueaddedbyindustrialoriginin 1967 (billionSwissfrancs) 129.4 (inpercentofGDPatfactorcost): Growthofreal GNP, 1971-1974average Agriculture 6.4 (annualrate, percenl) 3.3 Industry 49.6 Grossfixedinvestmentin 1973 Other 44.0 (inpercentofGNP) 27.9 Growthofrealfixedinvestment.1971- 1974 average (annual rate, per cent) 1.8 THE GOVERNMENT Publicconsumptionin 1973 CompositionofParliament (inpercentofGNP) 11.4 (percent): Taxrevenuein 1972 National State (inpercentofGNP) 16.2 Council Council Publicdebtinpercentofcurrentreceipts (1973) 61.9 ConservativeChristian Socialists 22.0 31.6 RadicalDemocrats 24.5 34.1 Socialists 23.0 9.1 Agrarians 11.5 11.4 Other 19.0 6.8 Lastelections: 1971 Nextelections: 1975 FOREIGN TRADE Exportsofgoodsandservicesincluding Importsofgoodsandservicesincluding factorincomesasapercentageofGNP factorincomesasapercentageofGNP (average 1969-1973) 37.3 (average 1969-1973) 34.8 Commodityexports Commodityimports (fob,million USdollars, 1973) 9525 (cif,million USdollars, 1973) 11 621 Percentagedistribution(1973): Percentagedistribution(1973): ToOECDcountries 77.0 FromOECDcountries 89.6 Todevelopingcountries 16.9 Fromdevelopingcountries 7.8 Food,drinksand tobacco Food,drinksandtobacco (S1TCgroups0and1) 4.6 (SITCgroups0and 1) 12.4 Materials(2, 3,4) 2.4 Materials(2,3,4) 12.3 Semi-finishedgoodsandchemicals Semi-finishedgoodsandchemicals (Sand 6) 38.4 (5and6) 32.2 Finishedmanufacturedgoods(7,8, 9) 54.6 Finished manufacturedgoods (7, 8,9) 43.1 THE CURRENCY Monetaryunit:Swissfranc CurrencyunitsperUSS: (a) Centralrateestablishedin December 1971 3.84 (fr) Since23rdJanuary1973floating; the January 1975 average daily ratewas 2.5268 Note An international comparison ofcertain basic statistics is given in an annex table. OECD ECONOMIC SURVEYS A RC HIVE8- RÉFÉRENCES - DOCUMENT *»RÊTiif - RETOUR BUREAU 610 SWITZERLAND ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The Organisation jor Economic Co-operation and Development (OECD) was set up under a Convention signed in Paris on 14th December, 1960, which provides that the OECD shall promote policies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial sta¬ bility, and thus to contribute to the development of the world economy; to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accord¬ ance with international obligations. The Members of OECD are Australia, Austria, Belgium, Canada, Denmark, Finland. France, the Federal RepublicofGermany, Greece, Iceland,Ireland,Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Por¬ tugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Socialist Federal Republic of Yugoslavia is associated in certain work of the OECD, particularly that of the Economic and Development Review Committee. The annual review of Switzerland bytheOECDEconomicandDevelopmentReviewCommittee took place on 30th January, 1975 The present Survey has been updated subsequently. © Organisationfor Economic Co-operation and Development, 1975. Queries concerning permissions or translation rights should be addressed to : Director ofInformation OECD 2. rue André-Pascal, 75775 PARIS CEDEX 16, France TABLE OF CONTENTS Introduction I Recent trends 6 1 Weakening ofdemandpressure and appreciable slowdowninactivity 6 2 Persistenceofinflationarypressures 15 3 ResilienceofthecurrentbalanceandappreciationoftheSwissfranc 24 II Broad lines of economic policy 32 Demand management policy 32 Monetary policy 33 Budgetary policy 39 Policyofprice and income surveillance 42 Energy policy 43 HI Prospect for 1975 and economic policy conclusions 44 TABLES Text 1 Demand and output 7 2 Indicators ofhouseholds' consumption expenditure 9 3 Indicators ofconstruction activity 10 4 Indicators ofinvestment inmachinery and plant 11 5 Population, employment, labour market 14 6 Pricetrends in Switzerland and abroad 15 7 Trend ofprices 16 8 Components ofthe rise inconsumerprices 21 9 Wage rates in industry and construction 22 10 Components ofindustrial wage growth 22 11 Structural comparisons : (a) Current balances 27 (b) Energy consumption in 1973 27 12 Foreign trade bycommodity groups 28 13 Exports by geographical markets 29 14 Balance ofpayments "*30 15 Money supply and counterparts 38 16 Budgets ofcentral government and local authorities 40 17 Confederationbudget, economic classification 43 18 Prospects for 1975 45 Statistical Annex: A National productand expenditure in current prices 53 B National product and expenditure at 1958 prices 54 \ OECDEconomicSurveys C Income and expenditure ofhouseholds and privatenon-profit institutions 55 D Gross domesticproduct atfactor costby industrial origin 56 E Construction at 1958 prices 56 F Interest rates and capital markets 57 G Current government transactions 58 H Foreign trade by area 59 I Foreign trade by commodity groups 60 J Balance ofpayments 61 K Public expenditure by function 62 and 63 DIAGRAMS 1 Indicators ofdemand pressure 8 2 Components ofaggregate demand 12 3 Business surveys in manufacturingindustry 13 4 Consumer prices and wholesaleprices 17 5 Indicators linked withthe trend offood prices 18 6 Importprices, wholesale prices and retail prices ofenergyproducts 20 7 Demand pressure, prices and wages 21 8 Relative prices 23 9 Importprices and exchange rate changes 25 10 Terms oftrade and effective rates ofexchange 26 II Effective rates ofexchange 31 12 Interestrates 35 13 Capital market 36 14 Monetaryindicators 37 INTRODUCTION In 1974 Switzerland, like most Member countries, entered a phase ofeconomic adjustment characterised by some restructuring ofdemand and the beginnings ofa reorganisation ofproduction. This was partly attributable to the consequences of the rise in the price ofoil and in prices ofa number ofimported commodities, but was also an outcome of the demand management policy introduced by the Swiss authorities. Persistence of strong inflationary pressure caused the authorities to maintain a restrictive stance in their policy. Autonomous deflationary factors and the maintenance ofa restrictive policy brought about a significant weakening ofthe demand pressure, amarked slowdown in activity andaneasingofthelabourmarket. Strong inflationary pressure did admittedly continue throughout the year, but the trend ofprices, and particularly ofwages, proved to be more moderatethan might have been feared atthe end of 1973. Switzerland's performance inthis respect was somewhatless unsatisfactorythanthose ofmost other Member countries. Another aspect ofthe recent short-term trend is that, in spite of the considerable apprecia¬ tion ofthe Swiss franc, export growth was relatively sustained, at least during the first half ofthe year, whilst weaker domestic demand caused imports to decline in real terms. In all, the deterioration ofthecurrentbalancewassmallbycompar¬ ison with most other Member countries. As mentioned earlier, the fight against inflation continued to be the primary objective ofeconomicpolicy in 1974. Because ofvarious constraintswhich,inpar¬ ticular, prevented a more active use ofbudget policy, it was essentially by means of monetary and financial instruments that the authorities moderated the growth of aggregate demand and attempted to relieve inflationary pressure. It should be notedthatdemandmanagementpolicywasalwaysappliedveryflexibly. Theautho¬ ritieswerealsoledtotakeanumberofmeasureslateintheyeartodiscourageinflows offoreign capital andthuspreventanexcessiveappreciation oftheSwissfrancwhich would undoubtedly compromise the balance on current transactions and give rise to serious sectoral difficulties. The short-term outlook is still clouded by many elements of uncertainty and, were economic policy to remain unchanged, activity might recede slightly in 1975. The authorities have therefore already announced thattheymightrelaxdemandmanagementpolicyiftheneedforthiswereto become apparent. PartI ofthe Survey, which dealswithdevelopments in 1974, analysesthecauses ofthe weaker trend in domestic demand and production, together with the reasons for the continuance of strong inflationary pressure; the trend of foreign trade and paymentsisalsodiscussedinthispart. The broadlinesofeconomicpolicy(demand management policy and energy policy) are reviewed in Part II. In Part III the short-term prospects are discussed and certain economic policy conclusions put forward. OECDEconomicSurveys I RECENT TRENDS Weakening ofdemandpressure and appreciable slowdown in activity The slowdown in aggregate demand, which began to be apparentin themiddle of 1973, became significantly more pronounced in 1974 and was accompanied by a shift fromdomesticto foreign demand. The decidedlymore restrictive stance given to demand management policy since the end of 19721 has caused an appreciable slowingofdomesticdemandgrowthandnotablyamuchweakertrendinhouseholds' demand, whichhas affectedresidential constructioninparticular. Foreigndemand, on the other hand, has continued to exert a considerable stimulus to the economy, although the impetus imparted by the buoyant growth ofmerchandise exports was partly offset by the generally unsatisfactory trend in exports of services and even diminished appreciably in the second halfofthe year. In all, according to the esti¬ mates ofthe forecasting group ofthe Federal administration, which are still provi¬ sional, the growth ofGNPinreal terms expressedasanannualaveragesloweddown sharply from about 3.5 per cent in 1973 to about nil in 19742, thereby causingthe emergenceofsomeidleproductivepotential3. Theyearlyaverageconcealscontrasted movements over the year, however. For instance, it is probable that activity was already levelling offinthe firsthalfof 1974, notably because ofthe downturninthe construction sector, and that in the second halfGNPeven decreased slightly in real terms owing to the marked slowdown in industrial production growth. Aggregate demand pressure has therefore lessened significantly since the middle of 1973; production bottlenecks have steadily eased in all industries and the construction market is no longer overheated. The labour market, which had been under considerable strain during the previous two years, also began to be easier in 1974. With the statistics available it is not possible to assess accurately the trend of households' consumption within the year. The parallel movements of a number of indicators (see Table 2) suggest, however, that the slowdown already observed in 1973 became much more pronounced in 1974 and that from purchases of goods, especially consumer durables, it progressively extended to demand for services. This is hardly surprising in view of the very small growth in households' real disposable income since the end of 1973. Given the fall in numbers employed and the rapid rise in prices, since the fourth quarter of 1973 the real wage bill increased only very slightly in industry and even declined significantly in the construction sector. Furthermore, households' incomes were affected by the automatic increase in direct taxation ("progression à froid"). In all, according to official estimates that are as yet provisional, consumption 1 Short-termpolicyisanalysedindetailinPartIIofthissurvey. 2 It should beremembered that in Switzerland's casenational accountingestimates mustbe interpreted with particular caution. Prior to 1970 already, there were no accounts on anoutput basis. Since 1970,accountingon an income basishas been discontinued and all that is available nowisanestimateofGNPonthebasisofthemaincomponentsofdemand. 3 EstimatesmadebytheSecretariatsuggestthatovertheperiodfrom 1968to1973thepoten¬ tialrateofGNPgrowthwasabout3.6percentayear. Assumingthatduringthatperiodpotential employmentwasvirtuallythesameasactualemployment, potentialproductivitygrowthinSwitzer¬ land would thus have been a little under 3 per cent during the last four years. For purposes of comparison,asemi-officialestimatemadebyK.SchiltknechtfortheEconomicResearchCommission, putsthepotentialincreaseinproductivityat2.8percentayearfortheperiod1951-1958. According toanotherestimate, based onanunpublished seriesforthe Swisscapital stock,theannualincrease in productivity per hour worked was 3.2 per cent from 1952 to 1968 (see J. C. Ardenti and J. P. Reichenbach, " Estimation delaFonction deProduction CESpourlaSuisse", Revue Suisse d'Économie Politique et de Statistiques, December 1972). For further particulars ofthe method used by the Secretariat to estimate Switzerland's productive potential see " The Measurement of DomesticCyclicalFluctuations",OECDOccasionalStudies,July1973. Switzerland Table 1 DemandandOutput 197:1 AnnualpercentagechangfiIn at current price» volume' SF Share 1970 1971 1972 1973 1974» million I960 Privateconsumption 73880 57.1 4.7 5.5 5.7 3.9 2.0 Publicconsumption 14935 11.5 4.7 3.7 4.5 4.1 2.5 Grossfixedassetformation 36145 27.9 6.1 7.8 7.7 -0.2 -7.5 Construction 24880 19.2 5.3 8.4 10.2 -0.3 -12.0 Machineryandequipment 11265 8.7 7.9 6.6 3.0 -0.1 2.5 Final domesticdemand 124960 96.6 5.1 5.9 6.2 2.7 -0.7 Stockbuilding3 1400 1.1 -0.6 0.3 -0.5 Exportsofgoodsandservices (includingfactorincomes) 47590 36.8 7.6 3.7 5.7 7.1 3.9 Importsofgoodsandservices (includingfactorincomes) 44580 34.5 9.1 6.9 6.5 5.6 0.3 Foreignbalance3 3010 2.3 -1.3 -0.3 0.7 1.3 GrossNational Product 129370 100.0 4.3 3.9 5.8 3.5 0.2 GNPimplicitpricedeflator 9.1 8.9 7.6 7.6 Industrialproduction 5.5 2.1 2.1 5.4 5.2* Productivityinindustry 4.0 2.4 3.7 6.4 Aggregateproductivity* 2.7 3.0 5.1 3.1 1 Atpreviousyear'sprices. 2 OfficialprovisionalestimatesmadeatthebeginningorDecember. 3 ChangesexpressedasapercentageofGNPinthepreviousperiod. 4 GDPperdependentworker. 5 Firstninemonthsof1974oncorrespondingperiodofpreviousyear. Sources:La VieEconomique;officialestimates. by households increased in real terms by about 2 per cent as an annual average in 1974 although it is possible that this figure somewhat overstates the real trend*. Gross fixed asset formation, which had already weakened significantly in 1973, probably showed an appreciable downturn in 1974. Built into this overall trend, however, are contrasting movements in individual categories. The decline in the construction sector, which began in 1973, grew much more pronounced in 1974, but there was some recovery in investment by enterprises in plant and equipment. Furthermore, according to estimates by the national experts, which admittedly are very uncertain, stock-building in volume terms in 1974 was significantly less than in 1973, notably because of the difficulty of obtaining short-term credit for this purpose. The steep decline in demand in the construction sector related essentially to investmentinhousingand civilengineeringprojects, whichwereparticularlyaffected by scarcer and dearer credit5, cutbacks in spending by local authorities and, to a lesser degree, by direct controls on building8. In the first half of 1974 the number 4 Inviewoftheverysmallgrowthofdisposableincome,thisestimateseemstoimplyadecrease in the saving ratio ofhouseholds. Yet, although no information is available on thebehaviourof households in this regard, certain factors may have led them to maintain or even increase their propensitytosave. There was an increasing tendency on the part of banks to ask households toamortizetheirmortgageloansprogressively. Thedeteriorationoftherealvalueoftheirfinancial assets, asaresult ofthecontinuingrapid upwardmovement ofpricesand thedeclinein thevalue ofsecurities, may have prompted households to save more in order to maintain the real value of their holdings. 5 Banks had difficultyin financingconstructionloans, since theresources theycould usefor thispurpose,chieflysavingdepositsandcashcertificates,increasedonlyslightlyin1974. Moreover, even when they wereable tofind thenecessary resources, theirlending operations were limited by thequantitativecreditrestrictionsimposedbytheauthorities. 6 Inordertostabilisetheconstructionmarket, partial bansondemolitionand building were imposed by federal order of 25th June, 1971. These were reinforced by further legislation on Setpage8 > OECDEconomicSurveys Diagram 1 Indicators ofdemand pressure Ratio 1.2 1.1 Déviationfromtrtndofindex ofindustrialproduction 1.0 Parcant M Judgtmtntonoutputcapacities S^ M M *0. N «I 20 20 0 0 Judgementonlabourbottlenecks Thouwnds -20 3 Residentialconstructs Ratio Gapbtiwnnparmitiissutdanddwelling*conitructatf (hittot») 4-quartermovingaverages 0.1 / H °2 -I û.i 0.4 Proportionofdwellingsvacant (rightscs/t) 0.5 Labourmarket Ratioofjobofferstojobseekera (parctntchangesfrompreviousyear) 0.6 \ Parcant 1HI 1H9 1170 1J71 1J72 1)73 U74 Sources: IWETH, Berichte der Konjunkturforschungsstelle, La Vie Economique and OECD Main Economic Indicators. Endofnote6. 20thDecember, 1972,whichextendedthemtocoverthewholeofthenationalterritoryand a larger numberofbuildingcategories. Adjustmentsweremadesubsequently; however,inSeptember 1973, 634Communeslocatedforthemostpartin mountainareasandaccountingfornomorethan5per cent of the total resident population were exempted from the prohibitions. Generally speaking, the authorities have sought not to hold up the construction oflow- or medium-cost housing and priorityinfrastructure projects in the public and private sectors. By and large, thecontrols seem tohaveaffectedtheurbancentresmorethan theruralcommunes. InNovember1974the ban on demolitionandconstructionwasentirelyliftedwitheffectfrom1stJanuary, 1975.