As many countries across the globe battle sky-high inflation, Switzerland’s economy is seeing something far less dramatic.

Inflation in Switzerland hit a 29-year high of 3.5% in 2022. While high by Swiss standards, that figure is well below the double-digit inflation of comparable economies including the United States (9.1%), United Kingdom (11.1%) and euro zone (10.6%).

On top of that, economists say it’s easing.

“It’s coming down a little bit,” Tobias Straumann, professor of modern and economic history at the University of Zurich, told CNBC.

So, what is it about the Swiss economy that’s allowed it to largely sidestep inflation, and what can other countries learn from it? Watch the video to find out. https://cnb.cx/41qXuXw

#CNBC #Inflation #Switzerland #Economy 

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It's hard to talk about the economy these days without thinking of 1 word, inflation.

But as many countries across the globe battle sky-high inflation, here in Switzerland, a small mountainous nation in Western Europe, the rise in prices has been far less dramatic.

Have you felt the effects of price rises and inflation over the past year?

You think Switzerland somehow got it a bit more right than maybe other places?

Inflation in Switzerland hit a 29-year high of 3.5% in 2022.

While still high by Swiss standards, it is well below the double-digit inflation rates in other advanced economies like the US, UK and Eurozone.

So what is it about the Swiss economy that means it's largely avoided rampant inflation and what can other countries learn from it?

There are multiple parts to Switzerland's inflationary story.

For starters, prices in the country are already beginning from a high base.

Switzerland is 1 of the world's wealthiest countries, with a GDP per capita outstripping that of other major economies like the US, Japan and Germany.

the richest citizens in the world, with an average wealth of nearly $700, 000 per adult and a steep cost of living to match.

In 2022, the Swiss cities of Zurich and Geneva held steady among the world's 10 most expensive cities, even as inflation pushed up living costs in other pricey places like Singapore, New York, and Tel Aviv.

Tobias Strommen is a professor of modern and economic history at the University of Zurich.

It's because people are on average quite rich.

The share of food in the overall budget of households is not as big as maybe in other countries.

We also have inequality, of course, but from an international perspective, we have, I think, a very well-functioning social policy.

As a result, Swiss citizens are generally less impacted by price hikes because they tend to spend a lower proportion of their income on essentials versus discretionary items such as vacations and hobbies,

which they can scale back when prices go up.

Another reason for Switzerland's relative price stability stems from the strong Swiss franc.

The country's currency has also steadily strengthened, rising in value against the euro to reach parity in 2022.

And while the US dollar strengthened against many major currencies in 2022, the Swiss franc held steady amid volatility in Europe.

That's largely due to its status as a safe haven currency or defensive asset.

The Swiss franc is heavily backed by large reserves of gold, bonds, and financial assets, which help the Swiss National Bank ensure the country's stability during times of volatility.

It's been a safe haven currency in times of crisis, and it actually started about 100 years ago, after World War I.

And of course, with the war and all that, and COVID, the Swiss franc again was in much demand.

The strength of its currency is also beneficial for its economy, which is heavily dependent on international trade.

In 2020, Switzerland imported around $300 billion worth of goods and services, the majority of which come from neighbouring EU countries.

A stronger Swiss franc therefore provides an effective discount on those imports.

In the same year, Switzerland exported a near equal amount, but those tended to be higher value goods and services, such as watches and pharmaceuticals, which are less susceptible to price fluctuations than low-margin, mass-produced commodities.

Switzerland is also less exposed to some volatile external factors that pushed prices higher in 2022, such as soaring oil and gas prices caused by Russia's war in Ukraine.

Home to around 1, 500 lakes and numerous rivers, hydropower plays a key role in Switzerland's energy production.

Hydroelectricity accounts for more than a tenth of Switzerland's energy consumption, making the country less reliant on oil and gas imports than some of its European neighbours.

Swiss energy suppliers are also largely publicly owned, which means they're less exposed to extreme market volatility through financial safety nets, but are also subject to more strict pricing regulation.

In Switzerland, we have a lot of state control of prices, which is kind of strange because you think of Switzerland as a very liberal country.

But in the crucial areas like energy and rent, you have a lot of public controls.

That means that the inflation rate is stretched over time.

It doesn't mean that there is no inflation at all, but you can avoid that you have a certain short-term effect.

At the end of 2022, energy prices in Switzerland rose at a rate of 16.2%, below the levels faced by major peers like Germany, the Netherlands, the UK, and Italy.

Switzerland's energy regulator now expects prices to rise by a further 27% in 2023, with the typical annual household bill topping 1, 215 Swiss francs.

Jean-Claude Huber is the manager of Hotel Piz Buin Cloisters in the east of Switzerland.

He said standardisation of long-term energy contracts have sheltered businesses like his from rising costs in 2023.

This year I'm not worried because the contract is still the end of the year.

Afterwards it will go up by multiple of 5 probably.

The four-star hotel's dynamic pricing structure also means that Huber has been able to pass on price hikes of around 5% to 10% to the consumer without hurting demand.

We can absorb it because we can play with the rates much more than if you have fixed rates all the time, and that helps us a lot.

If you take 2 or 3 star hotels, they will have much more problems because these people are very much more sensitive on the costs.

Alongside energy, Switzerland also has stringent controls around the price of goods and services, making it less susceptible to inflation-led price fluctuations.

Of the core products used to measure inflation in the eurozone, including food, housing and transport, almost 1 third are subject to price regulation in Switzerland, more than any other European country.

High tariffs on certain agricultural imports also mean that domestically produced foods, such as milk and cheese, are preferentially priced and less impacted by movements in global food markets.

We try to buy as much as possible Swiss, but even regional, which really means bread, milk products, and so on, to buy them locally.

Long-term, you want to have a local industry working, functioning, and you need farmers.

So it's important that they can sell their products.

In December of 2022, Swiss food prices rose at an annualised rate of 4%.

That compares with 11.9% in the US, 16.9% in the UK and 19.8% in Germany.

At the restaurant, the food cost, we can adapt very easily in increasing the cost of the meals.

But we're cautious also, because you shouldn't exaggerate.

All of that doesn't mean Swiss consumers have been totally immune to recent price hikes, however.

In fact, some say they're feeling the pinch more than ever.

Some groceries have gotten more expensive.

As usually, it's the poor people or the low wages that suffer from it, and they really have a problem.

Switzerland's central bank said it now expects inflation to dip to an average of 2.4% in 2023 before falling to 1.8% in 2024.

if you have kind of a recessionary scenario, people are still coming in.

And I expect the same thing for this year 2023 and probably also for 2024.

if anything do you think other countries can learn from the Swiss model?

Exchange rate policy is very difficult to imitate because we have the euro and the euro has to consider all countries and I think for some countries an appreciation would be maybe good for import prices but really bad for export.

This question about who owns energy production, Maybe it's a good idea to think about to re-nationalize at least part of it, to be more resilient and to have a long-term owner who really looks for the consumer.

In other places in Europe there was a clear shift to privatization and in the medium short term that was a very good idea but it's not very resilient and they're haunted by these decisions now.

At the time many people said the Swiss are too conservative but I'd say in retrospect it was a very good decision.


Speaker 0: Rising costs and higher interest rates. It's hard to talk about the economy these days without thinking of 1 word, inflation.

Speaker 1: But as many countries across the globe battle sky-high inflation, here in Switzerland, a small mountainous nation in Western Europe, the rise in prices has been far less dramatic. Have you felt the effects of price rises and inflation over the past year?

Speaker 0: Not that much, to be honest.

Speaker 2: It's been all right.

Speaker 1: Most of the things is okay. You think Switzerland somehow got it a bit more right than maybe other places? I think so.

Speaker 0: Inflation in Switzerland hit a 29-year high of 3.5% in 2022. While still high by Swiss standards, it is well below the double-digit inflation rates in other advanced economies like the US, UK and Eurozone.

Speaker 1: So what is it about the Swiss economy that means it's largely avoided rampant inflation and what can other countries learn from it? There are multiple parts to Switzerland's inflationary story. For starters, prices in the country are already beginning from a high base.

Speaker 0: Switzerland is 1 of the world's wealthiest countries, with a GDP per capita outstripping that of other major economies like the US, Japan and Germany.

Speaker 1: It is also home to some of

Speaker 0: the richest citizens in the world, with an average wealth of nearly $700, 000 per adult and a steep cost of living to match. In 2022, the Swiss cities of Zurich and Geneva held steady among the world's 10 most expensive cities, even as inflation pushed up living costs in other pricey places like Singapore, New York, and Tel Aviv. Tobias Strommen is a professor of modern and economic history at the University of Zurich.

Speaker 2: It's because people are on average quite rich. The share of food in the overall budget of households is not as big as maybe in other countries. We also have inequality, of course, but from an international perspective, we have, I think, a very well-functioning social policy.

Speaker 0: As a result, Swiss citizens are generally less impacted by price hikes because they tend to spend a lower proportion of their income on essentials versus discretionary items such as vacations and hobbies,

Speaker 1: which they can scale back when prices go up. Another reason for Switzerland's relative price stability stems from the strong Swiss franc.

Speaker 0: The country's currency has also steadily strengthened, rising in value against the euro to reach parity in 2022. And while the US dollar strengthened against many major currencies in 2022, the Swiss franc held steady amid volatility in Europe. That's largely due to its status as a safe haven currency or defensive asset. The Swiss franc is heavily backed by large reserves of gold, bonds, and financial assets, which help the Swiss National Bank ensure the country's stability during times of volatility.

Speaker 2: It's been a safe haven currency in times of crisis, and it actually started about 100 years ago, after World War I. And of course, with the war and all that, and COVID, the Swiss franc again was in much demand.

Speaker 0: The strength of its currency is also beneficial for its economy, which is heavily dependent on international trade. In 2020, Switzerland imported around $300 billion worth of goods and services, the majority of which come from neighbouring EU countries. A stronger Swiss franc therefore provides an effective discount on those imports. In the same year, Switzerland exported a near equal amount, but those tended to be higher value goods and services, such as watches and pharmaceuticals, which are less susceptible to price fluctuations than low-margin, mass-produced commodities.

Speaker 1: Switzerland is also less exposed to some volatile external factors that pushed prices higher in 2022, such as soaring oil and gas prices caused by Russia's war in Ukraine.

Speaker 0: Home to around 1, 500 lakes and numerous rivers, hydropower plays a key role in Switzerland's energy production. Hydroelectricity accounts for more than a tenth of Switzerland's energy consumption, making the country less reliant on oil and gas imports than some of its European neighbours. Swiss energy suppliers are also largely publicly owned, which means they're less exposed to extreme market volatility through financial safety nets, but are also subject to more strict pricing regulation.

Speaker 2: In Switzerland, we have a lot of state control of prices, which is kind of strange because you think of Switzerland as a very liberal country. But in the crucial areas like energy and rent, you have a lot of public controls. That means that the inflation rate is stretched over time. It doesn't mean that there is no inflation at all, but you can avoid that you have a certain short-term effect.

Speaker 0: At the end of 2022, energy prices in Switzerland rose at a rate of 16.2%, below the levels faced by major peers like Germany, the Netherlands, the UK, and Italy. Switzerland's energy regulator now expects prices to rise by a further 27% in 2023, with the typical annual household bill topping 1, 215 Swiss francs. Jean-Claude Huber is the manager of Hotel Piz Buin Cloisters in the east of Switzerland. He said standardisation of long-term energy contracts have sheltered businesses like his from rising costs in 2023.

Speaker 3: This year I'm not worried because the contract is still the end of the year. Afterwards it will go up by multiple of 5 probably. So that's really a big increase. But, okay, we'll have to manage that.

Speaker 0: The four-star hotel's dynamic pricing structure also means that Huber has been able to pass on price hikes of around 5% to 10% to the consumer without hurting demand.

Speaker 3: We can absorb it because we can play with the rates much more than if you have fixed rates all the time, and that helps us a lot. If you take 2 or 3 star hotels, they will have much more problems because these people are very much more sensitive on the costs.

Speaker 1: Alongside energy, Switzerland also has stringent controls around the price of goods and services, making it less susceptible to inflation-led price fluctuations.

Speaker 0: Of the core products used to measure inflation in the eurozone, including food, housing and transport, almost 1 third are subject to price regulation in Switzerland, more than any other European country. High tariffs on certain agricultural imports also mean that domestically produced foods, such as milk and cheese, are preferentially priced and less impacted by movements in global food markets.

Speaker 3: We try to buy as much as possible Swiss, but even regional, which really means bread, milk products, and so on, to buy them locally. Long-term, you want to have a local industry working, functioning, and you need farmers. So it's important that they can sell their products.

Speaker 0: In December of 2022, Swiss food prices rose at an annualised rate of 4%. That compares with 11.9% in the US, 16.9% in the UK and 19.8% in Germany.

Speaker 3: At the restaurant, the food cost, we can adapt very easily in increasing the cost of the meals. But we're cautious also, because you shouldn't exaggerate.

Speaker 1: All of that doesn't mean Swiss consumers have been totally immune to recent price hikes, however. In fact, some say they're feeling the pinch more than ever. So where have you felt it most?

Speaker 0: Energy prices, electricity.

Speaker 2: Some groceries have gotten more expensive.

Speaker 3: As usually, it's the poor people or the low wages that suffer from it, and they really have a problem.

Speaker 0: Switzerland's central bank said it now expects inflation to dip to an average of 2.4% in 2023 before falling to 1.8% in 2024. Even

Speaker 2: if you have kind of a recessionary scenario, people are still coming in. And that, of course, stabilises demand. And I expect the same thing for this year 2023 and probably also for 2024. What

Speaker 1: if anything do you think other countries can learn from the Swiss model?

Speaker 2: Exchange rate policy is very difficult to imitate because we have the euro and the euro has to consider all countries and I think for some countries an appreciation would be maybe good for import prices but really bad for export. This question about who owns energy production, Maybe it's a good idea to think about to re-nationalize at least part of it, to be more resilient and to have a long-term owner who really looks for the consumer. In other places in Europe there was a clear shift to privatization and in the medium short term that was a very good idea but it's not very resilient and they're haunted by these decisions now. At the time many people said the Swiss are too conservative but I'd say in retrospect it was a very good decision.

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Countries are struggling to contain inflation, but not Switzerland. Here's why