Swiss economy and government bonds: 2024 outlook

Economic activity in Switzerland is expected to remain sluggish in the first part of 2024 amid euro area weakness but should pick up gradually from Q2 onwards. Stripping out the impact of major sporting events, we project annual GDP growth of 0.9% in 2024, after an estimated 1.2% in 2023. These figures are below the potential growth rate of 1.7-1.9%.

Inflation in Switzerland has fallen rapidly from its peak of 3.5% in August 2022, helped by the Swiss franc’s strength and base effects from energy. But domestic price pressures are expected to increase due to higher rents, electricity prices and VAT hikes. We expect headline inflation to average 1.7% in 2024, which is still above the pre-pandemic long-term average, with rental inflation introducing a note of uncertainty into the outlook.

The Swiss National Bank (SNB) is probably done with rate hikes. Domestic price pressures will keep the SNB on hold in 2024, in our view. Yet the balance of risk is tilted towards a rate cut in H2 2024, depending on what other central banks do. Given reduced imported price pressures, we expect the SNB to be less active in the FX market.

Swiss 10-year government bonds have outperformed those from the US and Germany year-to-date, rising in value by 6.7% (as of 24 November). We expect the 10-year Swiss bond yield to fall from 0.97% on 27 November to 0.90% by the end of 2024 due to the weakening of economic growth.

Swiss bonds’ strong performance is linked to the fact that Swiss inflation is already within the SNB’s target range of between 1–2%, making it the first major central bank to have achieved its price stability objective since the post-pandemic surge in inflation. The speed with which Swiss inflation has returned to target and the SNB’s resolve in this regard have reinforced the SNB’s credibility. Bond investors are therefore unlikely to require a higher inflation risk premium on long-dated Swiss bonds, as is likely to be the case for other core sovereign bonds.

Given yields are relatively low and we only expect limited additional yield compression next year, we forecast a low single-digit return for Swiss government bonds in 2024. For this reason, we remain underweight in Swiss government bonds, in contrast with our overweight positions in US Treasuries and core euro government bonds.