The major bank fears that the «model student» Switzerland could go «astray» and formulates a cautious wish list for economic policy.
UBS has not lacked attention, especially since the takeover of Credit Suisse in the spring of 2023. Politics and regulators want to tame the new «super bank» with tightened requirements, better too-big-to-fail rules (resolution), and more powers for the financial market supervisory authority Finma.
The Federal Council’s 340-page report on banking stability from April, with measures that affect not only but especially UBS, is eloquent testimony to the creativity of politics. Finma and the Swiss National Bank have since missed no opportunity to prominently place their essentially congruent demands in the media.
The Gloss Fades
Now UBS is turning the tables in its latest «Outlook» and depositing a series of demands addressed to politics. The starting point is the question of how to prevent the economic «model student» from going «astray.»
At first glance, Switzerland stands out as exemplary – in terms of growth, exports, and fiscal policy, note the three UBS economists Alessandro Bee, Florian Germanier, and Maxime Botteron. However, on closer inspection, challenges and risks become apparent.
Germany as a Cautionary Example
The authors point to the acceptance of the popular initiative for a 13th AHV pension and how quickly Germany, once also considered a model, has declined to the «sick man of Europe.» Switzerland’s lead in economic growth (especially in the per capita dimension) is also shrinking.
Switzerland needs to better exploit its labor potential, particularly among older workers and part-timers. Incentives could include subsidizing external childcare or tax advantages for older workers.
Concentration Risk in the Pharmaceutical Industry and Regulatory Jungle
According to UBS, the fact that export growth is mainly driven by the pharmaceutical industry poses a concentration risk for the economy. Here, UBS recommends that politics create a more innovation-friendly environment. This includes regulating the relationship with the EU and clearing the regulatory jungle for industrial companies. UBS criticizes long procedures for company foundations and product approvals as well as inadequate digitalization in public services.
Even the exemplary fiscal policy of the past two decades faces «major challenges.» The authors remind us of the net-zero goal for greenhouse gas emissions and the changed geopolitical situation, which suggests an increase in defense spending. The biggest challenge, however, is the demographic issue, namely the decreasing proportion of the working population due to the aging society and the associated additional burden on social systems.
Raising the Retirement Age
UBS recommends a combination of revenue increases and spending cuts to prevent long-term debt from getting out of hand and emphasizes the significant effect of raising the retirement age to 67 years, respectively extending the working life.
The authors not only draft an economic policy wish list but also consider the feasibility and limits of state shaping power (aspects that are sometimes neglected in financial market regulation). First, there is a conflict of goals between subsidies and other state financial incentives and sustainable fiscal policy.
The Limits of State Shaping Power
Second, it is questionable whether measures to exploit labor potential actually lead to the desired behavioral changes. For example, it is known that promoting women’s employment has motivated men to work more part-time today. Third, industrial policy measures, such as those to promote innovation, are not in the tradition of liberal Swiss economic policy.
The mandate to politics is thus to «carefully weigh» the options. However, UBS does not only criticize the state but also appeals to companies to rely less on external help during shocks, as was the case during the pandemic. A higher retirement age also requires that companies are willing to continue employing older workers under attractive conditions – whether UBS sets a good example as an employer in this regard is not indicated in the «Outlook.»
Growth and Inflation Forecasts
And for those more interested in Switzerland’s development in the near future than in the coming decades, the economists have fresh forecasts. The major bank expects economic growth of 1.3 and 1.5 percent in 2024 and 2025, respectively, and assumes that the inflation rate will drop from 1,2 to 1 percent.
