“All things considered, the economy got away with a black eye.”
Interview with Claude Maurer
In an interview, Claude Maurer, Head of Swiss Macro Analysis & Strategy at Credit Suisse, pins down what impact the coronavirus crisis is having on both the global and Swiss economies and explains whether it has any similarities with the 2008 financial crisis.
Mr. Maurer, Switzerland went into lockdown a year ago and that was then followed up by measures of varying intensity devised to contain the spread of the pandemic, some of which are still in place today. How is the Swiss economy faring?
All things considered, the economy got away with a black eye. The recession during the first lockdown wasn’t as deep and recovery began more swiftly than even we had expected. Accordingly, even our forecasts for 2020, which were relatively optimistic compared to those of other institutes, were still too pessimistic. Fortunately, the doomsday scenarios predicted by the State Secretariat for Economic Affairs (SECO), the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) never materialized.
Thanks to decisive government intervention and automatic stabilizers like short-time work, household incomes have not taken a hit. Accordingly, that meant there was still financial potential for catch-up consumption once the restrictions had been lifted. And given the low case numbers we saw in the summer, people actually felt comfortable going to stores and visiting restaurants again. At the same time, the swift provision of liquidity assistance succeeded in preventing a wave of bankruptcies.
While the intensity of the second wave likely caught us all by surprise, it’s causing substantially less economic damage than what was sustained during the first wave. First of all, the measures being taken to stop the virus’ spread are much less drastic than during the first wave and both schools and daycare centers are either open or childcare is guaranteed. Added to that is the fact that companies have safety precautions in place and consumers have confidence in those precautions. Second, the world as a whole isn’t caught in the throes of a synchronous downturn anymore. While more than 90% of countries around the globe were in a recession during the first wave, North Asia, especially China, has had the pandemic well under control since mid-2020. Demand from this region, home to around a third of all industrial manufacturing, benefits the Swiss export industry either directly or indirectly. And third, vaccinations mean that an end of this state of emergency is in sight. So the coronavirus might be able to delay the recovery, but the economy is extremely likely to pick up an enormous amount of momentum over the course of the year.
Which impact will the coronavirus have on Switzerland’s economy in 2021 – and beyond?
Something akin to normality is likely to return to large sections of the economy toward the end of the year. I have confidence in the medical community and people’s common sense. The vaccines work and their production and distribution capacities will be expanded. Willingness to get the vaccine also seems to be higher than feared, in part because we’re all yearning for normality – and travel, which very well might hinge on vaccination. Safety precautions are also becoming increasingly sophisticated.
A small portion of the economy will continue to suffer for a while longer, with one of those industries being intercontinental tourism. Unemployment will remain elevated for some time as a result of this mix and a high unemployment level goes hand in hand with subdued consumer sentiment and little inflationary pressure. Accordingly, while private consumption is likely to gain enormously over the course of the year, that momentum will taper off again quickly after catch-up consumption has ended.
The Federal Council has provided liquidity assistance to Swiss firms through its COVID-19 loan scheme and Swiss banks played an important role in that. What about fears of loan defaults? Will there be a credit bubble?
The important thing was to get money to the businesses quickly, otherwise we would have seen a wave of bankruptcies or other problems in the supply chains. That goal was reached. It was clear that some of those loans would end in default and the federal government set some money aside for precisely that reason. However, the fact that the program is far from being exhausted and companies have already started to repay those loans suggests that the number of defaults will be limited.
What can be said about the general impact of COVID-19 on the global economy? Do you see any parallels to the financial crisis of 2008?
There are parallels, but also some major differences. First of all, unlike the coronavirus pandemic which is finite, at the start of the financial crisis we had to assume that the dry spell would last for years. Second, the banks aren’t part of the problem this time, rather part of the solution. Accordingly, the measures taken by central banks have actually reached the real economy. Third, fiscal policy intervention has been much more rapid and decisive, which made for a substantially more intense but much shorter slump and a stronger recovery.
One thing that both crises have in common is that, in their wake, national debt is significantly higher than at the onset, with the coronavirus pandemic exceeding anything we have ever seen before.
What economic (recovery) outlook can you offer for Europe and the US?
Not only is the US profiting from Biden’s enormous fiscal stimulus package, but their vaccination campaign seems to be progressing better than Europe’s. Accordingly, recovery on that side of the Atlantic will probably be swifter and stronger than in Europe.
The prospect of strong growth in the US has already aroused fears of inflation. Even assuming that inflation only overshoots briefly (mainly because oil prices are much higher than during last year’s global lockdown), changed market expectations will prompt interest rates on government bonds to rise gradually. Meanwhile, the central banks, with the US Fed leading the way, will also leave their key rates unchanged for some time to come to keep the short end of the interest rate curve low.
Europe took another step toward a fiscal union and greater integration during the crisis by creating a joint recovery fund. That reduces the risk of the eurozone’s collapse even further, which gives the euro a boost in turn.
I’d like to finish up with a personal question: What are you looking forward to most once the situation surrounding the pandemic has returned to normal?
I’m looking forward to sitting down and chatting with clients and colleagues. I firmly believe that coffee makers are innovation drivers.
In my private life, I’m looking forward to being able to get together with friends and family – preferably in a nice restaurant.