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UBS Outlook Switzerland: The middle class under pressure?

Zurich Media Releases Switzerland

Over the last three decades, the middle classes in many industrial countries have scarcely made any progress in terms of real earnings. They see themselves as relative losers from globalization. This has contributed to political polarization and the rise of populist politicians. In Switzerland, by contrast, several factors such as the strong Swiss franc and the dual education system have led to a comparatively balanced income development.

Zurich, 08 November 2016 – Even if Donald Trump is not elected as the next US president on 8 November, his rise illustrates how the polarizing forces on the far left and right have been gaining momentum for some years now. Middle-income groups feel that they are increasingly under threat from the effects of globalization. The strong rise in labor mobility and capital over the last 30 years has shifted value creation and many jobs that contribute to it toward emerging markets. At the same time, middle-class household incomes have stagnated in many Western industrialized nations.

Middle class share of total income relatively stable

The Swiss middle class, in contrast to other industrial nations, has not been left behind economically in recent years, although the share of income before tax and government transfers of the middle income groups has decreased slightly. But viewing incomes after government redistribution through taxes and  social security contributions, the middle class share actually rose slightly.

The UBS Chief Investment Office Wealth Management (CIO WM) sees various reasons for this relatively egalitarian development in income distribution. The strong Swiss franc and the minimal inflation of recent years have enabled income from employment as a proportion of gross domestic product (GDP) to rise steadily. At the same time, corporate earnings as a proportion of GDP has fallen in recent years due to the strength of the Swiss franc, and because interest and financial returns have been weaker. Companies bore the brunt of the currency risk in recent years, resulting in shrinking margins, but barely increased the level of unemployment. This countercyclical development in employment and capital incomes mainly benefited the lower income brackets. A glance at wage growth confirms this: since 2008, the lowest wages have seen the greatest percentage increases.

Switzerland's dual education system including professional apprenticeship schemes offers employees with below-average skills high-quality training opportunities. This guarantees direct access to the labor market, unlike countries that lack vocational training schemes. The middle classes fear the loss of employment in the second half of their professional lives. The likelihood of becoming unemployed decreases the older the employee, but so do job opportunities for older jobless people. Measures that promote further and continuous training, and adjustments to social insurance contributions, can make it easier for over-50s to reenter the workforce. Breaking the traditional link between age seniority and remuneration could also improve the attractiveness of older workers in the labor market.

The adjustment to the Swiss franc shock is still ongoing

The robust Swiss economic growth over the last four quarters stirs hope that the Swiss franc shock has been overcome. While it's true that many Swiss export industries – such as the pharmaceutical industry, for example – are already well advanced in this adjustment process, other sectors, such as the watchmaking industry or the retail trade, are still far from recovered. Companies' efforts to improve their competitiveness has led, among other things, to job cuts. UBS CIO WM does not expect a comprehensive economic recovery from the Swiss franc shock, and a turnaround in the labor market, until next year. The economic recovery and the labor market is likely to continue in 2018 and gain momentum.

In the coming quarters, the two most important central banks in the world, the Federal Reserve (Fed) and the European Central Bank (ECB), are expected to start gradually normalizing their expansive monetary policy. However, both are expected to normalize very slowly. We anticipate an interest rate hike from the Fed in December and two more in 2017. The SNB should have an initial opportunity to raise interest rates at the end of 2017 at the earliest, but only if the ECB ends its bond purchase program in the course of next year. If the end of the ECB program is postponed until 2018, the first SNB interest rate hike could take place for the first time the year after next.

In developing the UBS CIO WM economic forecasts, UBS CIO WM economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice.



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Media contact

Daniel Kalt, UBS Chief Economist Switzerland
Phone +41 44 234 25 60,

Sibille Duss, UBS Chief Investment Office WM
Phone +41 44 235 69 54,

Alessandro Bee, UBS Chief Investment Office WM
Phone +41 44 234 88 71,