Switzerland Economy

March 18, 2010Switzerlandby EW World Economy Team

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The economy of Switzerland is remarkable for its stability. It is the 20th largest economy in the world by nominal gross domestic product (GDP) and 9th by purchasing power parity (PPP).

The nation had a total economic output of $362.4 billion in 2012.

Famous for its favorable financial security laws, Switzerland is a preferred destination for foreign investors. Switzerland has a small labor force of 4.91 million, and these workers tend to be concentrated in the services industry, particularly in finance. As a result, the nation relies heavily on services, particularly in the financial services area, more than industry, as its main source of revenue. This has led to one of the highest levels of per capita income in the world, a balanced budget, and an unemployment rate that remains remarkably low.

Switzerland is a member of the United Nations (UN), the World Trade Organization (WTO), the International Monetary Fund (IMF), the World Bank, and the Organization for Economic Co-operation and Development (OECD).

Economic History

The area now known as Switzerland became a Roman conquest in 58 B.C. Subsequent invasions and conquering a succession of German tribes ensued before unification came in 1033 under the Holy Roman Empire. Because of its central European location, the area was always vital for military movements as well as trade routes. Of course, as with most of Europe at the time, the primary economic sector remained agriculture.

During the early Middle Ages, Switzerland was embroiled in almost perpetual war. Swiss armies were some of the most experienced and professional in the world. Yet, after hundreds of years of conflict, Switzerland entered into a "perpetual alliance" with France in 1516, marking the beginning of Switzerland's famous policy of neutrality. However, the nation's long martial history made the export of mercenary services an ongoing enterprise in Switzerland for several centuries to come.

While neutrality created a degree of external security, the nation remained torn by internal political and religious disputes. Switzerland struggled to maintain any semblance of national unity for more than two centuries, but by 1648, the nation emerged from the Thirty Years War with a formal recognition of its statehood via the Peace of Westphalia.

Switzerland became politically insignificant in the 18th Century, largely because of its neutrality. However, economically, the nation became remarkably wealthy. Its neutrality and increasing level of stability led to the development of a large scientific, creative, and intellectual community. However, this prosperity soon made Switzerland a target once more, so Napoleon Bonaparte invaded the nation soon after he ascended to power in France.

After Napoleon's defeat, the Treaty of Paris guaranteed Swiss neutrality for all time. However, the war-ravaged nation suffered an economic depression that led to a mass exodus. The country's stresses also increased as it experienced the transformations of the industrial revolution. Agriculture shrank to 50 percent of the economy and would continue to contract to just 25 percent by the 20th Century. Although industry began to supplant agriculture, large-scale manufacturing did not take hold, as most Swiss workers engaged in textiles in their homes. However, infrastructural improvements did begin in the mid-19th century, including the development of a national railroad.

After a brief, virtually violence-free civil war in 1847, the victorious radicals transformed the nation into a single unified state under a new constitution. The nation also instituted a series of social policies: such as nationalizing the railroads and creating social insurance. The latter half of the 19th century saw the rise of many institutions that remain hallmarks of the Swiss economy, such as the banking and insurance industries.

The 20th century saw a wave of immigrants fleeing political strife. This led to an overburdening of the local resources, causing an exodus of Swiss nations. With the onset of World War I, the textile industry took a serious blow from which it would never recover. Between the two World Wars, production stagnated, so the economy shifted to a services focus. While production and export of manufactured goods increased during World War II, one of Switzerland's chief trading partners was Nazi Germany. Fortunately, Switzerland's neutrality allowed it to trade with both the Axis and the Allies, preserving its economy after the war despite the loss of a major trading partner.

At the end of the war, Switzerland's imports and exports dramatically increased. While the industrial sector stagnated, it remained the primary foundation of the Swiss economy until the 1970s. At that point, the economic focus shifted again to the services sector, where it remains to this day.

In the 1990s, the economy slowed considerably and experienced the weakest rate of growth in Western Europe. Unemployment went from less than one percent before 1990 to 5.3 percent by 1997. A brief recovery ended in another recession in the early 2000s. Recovery from that recession ended, again, with the onset of the Global Recession in 2008.

Despite these ups and downs, unemployment rates remained among the lowest levels in the world, salaries remained relatively high, and the government remained solvent. These benefits result from protective financial policies that help to invite foreign investment even in the toughest of times and help to mitigate the damage caused by slowdowns in growth.

Current Economic Situation

The Swiss economy follows the traditional model of most modern nations, favoring a strong services sector. Services accounted for 71 percent of the economy as of 2012, while industry accounted for 27.7 percent, and agriculture made up the remaining 1.3 percent. The nation has a small labor force of just 4.91 million and unemployment of a mere 2.9 percent.

In addition to its famed financial services, Switzerland is also renowned for its chocolates (Nestle claims Switzerland as its headquarters.), fine watches, as well as a number of construction and chemical treatment products.

Switzerland's largest trading partner is Germany. The nation maintains a steady export surplus and a balanced budget. Switzerland ranks among the world's most prosperous nations in terms of private income. However, the division of wealth is very uneven among the population.

Economic Forecast

The Swiss economy did not perform well in the first quarter of 2015. However, this marked the first contraction in nearly four years. Analysts attribute the contraction to a strong franc that hurt Swiss exports. Nevertheless, an increase in demand for Swiss products by recovering European neighbors should compensate and allow for an expansion of the economy later this year.

As a result, financial experts believe the Swiss economy will expand by 0.7 percent through the end of 2015 and will pick up the pace in 2016, finishing out at 1.2 percent.

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