Switzerland: Economic Overview.

Switzerland is one of the richest countries in the world in terms of per capita income (that’s total GDP divided by the country’s population).

Switzerland’s GDP was  $679 billion in 2017. As small as it is, on a per-person basis, it boasts of a GDP of $68,060, which is the 8th highest in the world.

Its main trading partners are Germany, the U.S., France, Italy, Austria, Russia, and the U.K. Like Japan, Switzerland is also highly dependent on its exports, which make up about $308.3 billion or 58.2% of its GDP.

Switzerland’s main industries are machinery, chemicals, textiles, precision instruments, and watches. Don’t laugh at that last one – it actually comprises a decent chunk of Switzerland’s output! Anyway, it’s time to move on!

Monetary & Fiscal Policy

The Swiss National Bank (SNB), which is presently chaired by Mr. Thomas Jordan, conducts the nation’s monetary policy by influencing the country’s monetary and credit conditions.

The Governing Board, which is responsible for determining the bank’s policies, consists of 3 members – the Chairman, Vice Chairman, and a third member. That’s right – only three people are part of the board!

Unlike most central banks, the SNB sets a target range for its desired interest rate (also called Libor) rather than a fixed figure for three months.

On top of its purpose to control the country’s money supply and influence interest rates, the SNB has a more on-hand role in keeping the CHF’s valuation stable.

An excessively strong CHF could cause inflation to spike and could also undermine the country’s exports.

With Switzerland’s strong reliance on their exports, the SNB favors a weaker CHF and does not hesitate to intervene in the forex markets to weaken it.

One of the major monetary policies of the SNB is inflation targeting.

The bank’s inflation target, which is monitored in the CPI, is below 2% a year.

The bank will then attempt to influence the country’s actual inflation rate through open market operations and by adjusting the Libor rate.

Repurchase Transactions

Speaking of open market operations, the bank influences the Libor rate through short-term repurchase (repo) transactions.

A repo transaction involves selling a particular security for cash and agreeing to repurchase the same security at a later date.

If the interest rate in the open market rises over the SNB’s desired band, the central bank will supply the other banks with more liquidity through repo operations at lower repo rates.

On the other hand, the SNB can reduce liquidity by increasing the repo rate, eventually increasing the Libor rate as well.

On the fiscal side, one attractive fiscal policy that Switzerland has is that they have some of the lowest tax rates among developed nations.

In fact, it is often referred to as a “tax haven” nation.

Corporate tax rates in Switzerland run from 8.5% to 10.0%.

This, in addition to its bank secrecy laws, makes Switzerland one of the most business-friendly nations in the world.

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