As cries of hyperinflation arise amidst a seemingly never-ending inflationary spiral in major economies such as the US and UK, Switzerland emerges as one of the only nations enjoying continued growth in living standards and prosperity in 2022. An economy heavily dependent on the financial and services sector, the Swiss has historically witnessed strong economic growth, boasting one of the highest GDP per capita figures in the world.
Whilst having fallen in the Ease of doing business index in recent decades and subsequently seeing slower economic growth as such, the Swiss in recent times have avoided the mistakes by governments and Central Banks across the West that have provoked ever-climbing prices and a cost of living crisis not seen before in history. A strong energy market coupled with competent government and Central Bank officials, compared to the distasteful bureaucrats and woeful politicians across the rest of the developed world, have ensured that Switzerland avoided the inflationary spiral that is currently plunging millions into poverty.
Since the 19th century, the mentality of neutrality and independence has been engrained deep into Swiss culture. During both World Wars, Switzerland refused to join alliances, maintaining a neutral stance, enabled by its largely independent economy that wasn’t heavily reliant on its European neighbours. A similar story is told in the Swiss energy sector today. Compared to the likes of Germany which import over 60% of its energy, Switzerland produces most of its energy. Energy imports make up just over 40% of total energy consumption. This is thanks to the geography of Switzerland. Its mountainous geology and plentiful rivers have led to over 57% of energy production coming from hydropower.
Given the large price spikes in oil and gas due to a combination of spiralling demand from consumers and businesses, alongside supply shortages due to the Russian invasion of Ukraine and the subsequent sanctions, such energy independence has put the Swiss economy in a good place to weather the storm of climbing fossil fuel costs globally.
Switzerland was one of the first Western economies to hop on the Quantitative Easing train, led by Ben Bernanke and the Federal Reserve across the Atlantic Ocean. Between 2008 and 2013, no other Western Central Bank besides the BoE had purchased more securities than the Swiss National Bank. During this period, its balance sheet grew by 280%; by comparison, the Reserve Bank of Australia saw its balance sheet shrink by 10%.
The result was asset price inflation on an unprecedented scale. As funds flooded the financial markets, real estate prices soured. House prices grew on average 5% annually between 2008 and 2015. In comparison, the US saw property prices fall back to levels seen prior to the real-estate bubble that provoked the sub-prime mortgage crisis and the subsequent Global Financial Crisis. As house prices soared, so did the cost of living. In 2020, Switzerland had the highest price level for household consumption across Europe – 60% above the Eurozone average. With consumers already feeling the pinch prior to 2022, low Swiss inflation was to be expected.
Following the mistakes of the past decade, the Swiss National Bank didn’t engage in huge money supply growth and excessive Quantitative Easing. Unfortunately, other Western Central Banks didn’t learn from the mistakes of excessively expansionary monetary policy measures. Between 2020 and 2021, the balance sheet of the Swiss National Bank increased around by 17%. By comparison, the Federal Reserve saw its balance sheet increase by over 100%. Such reckless monetary stimulus by the Federal Reserve resulted in excessive liquidity in financial markets that has made its way into consumer markets in the form of higher consumer prices – the result of too much money chasing too few goods. As the SNB didn’t make such reckless and poor monetary policy decisions, the Swiss economy hasn’t experienced such rampant inflation as is the case in the US.
The correct monetary policy response amidst the coronavirus pandemic would’ve been the introduction of contractionary measures. As production of goods and services fell drastically in 2020, due to lockdowns preventing individuals from working, the money supply should’ve subsequently have fallen to keep prices stable. It comes back to supply and demand. If supply falls, demand must fall accordingly to maintain the same equilibrium price. Not only did demand not decrease in the aftermath of the pandemic – it increased drastically. Expansionary measures such as rate cuts and QE provoked sharp increases in the money supply, creating the inflationary spiral we see across the West. As the SNB didn’t increase the money supply by nearly as much as had occurred in the Eurozone, the US and the UK, its inflation levels are far lower.
With this said, the inflationary pressures are still rising in Switzerland. The inflation rate reached over 3% in June – a ten-year high. Whilst this is no figure to be alarmed about, such is the case in the UK and US with inflation rates of 9%, due to the aforementioned energy shocks in Eastern Europe, the Swiss economy cannot entirely avoid price hikes. Had the Swiss National Bank not engaged in any monetary stimulus during lockdown, inflation rates would be even lower than levels today – perhaps even negative.
Ultimately, the Swiss’ historic neutrality has continued in the battle against inflation globally. Having bounced back swiftly after WW2 due its neutral status, neutral monetary policy measures relative to other Western Central Banks have ensured inflation remains under control. Whilst the likes of the Eurozone, UK and US are leading the charge with inflation soaring above 9% in each region, stable monetary policy measures in face of the global pandemic have prevented inflation from spiralling out of control. Similarly, Switzerland’s energy independence has meant that the supply shortage isn’t nearly as acute as that of neighbouring European countries. The only shortage the Swiss appear to have compared with its peers is a shortage of inflation – hardly a problem at all.