Switzerland’s advantages in the fight against COVID-19

Switzerland is facing a dramatic economic downturn, and its private sector is unlikely to emerge from the COVID-19 pandemic and the massive restrictions on everyday life, in Switzerland and its trading partners, with merely short-term damage. The Swiss State Secretariat for Economic Affairs (SECO) now estimates that the country’s GDP will decline by almost 7% in 2020; as recently as late March, the same experts were assuming a decline of 1.5%.

Although the scale of the economic downturn cannot yet accurately be quantified, and the forecasts are highly uncertain, many observers are seeking to put the crisis in historical context and compare it to other pandemics. The comparison they most frequently make is with the Spanish flu pandemic that followed the First World War and killed around 40 million people over two years, including around 25,000 in Switzerland.

Of course, Spanish flu and COVID-19 are difficult to compare, not least as the health system 100 years ago was far less sophisticated, and the Spanish flu claimed the lives of many young people. Nonetheless, comparing the economic impact of the two pandemics produces some interesting insights.

Advantages of digitisation

First, COVID-19 is likely to result in a more significant economic downturn than the Spanish flu. Economists at Harvard have recently calculated that around the world the flu pandemic caused an average decline in real-terms GDP of around 6% – and, as SECO’s estimates show, that figure is likely to be higher in the countries most severely affected by COVID-19, which include Switzerland. In particular, the restrictions in place 100 years ago were much less drastic and had less impact on the economy. The Swiss Government did not close down the majority of public life, as it has in 2020.

Second, Switzerland has a well-developed welfare state and other instruments it can deploy. Even if the economy contracts more as a result of COVID-19 than the Spanish flu, the country is in a much better position to cushion the labour market impact by deploying social policy measures. For example, Switzerland has a compulsory unemployment insurance scheme and short-time working compensation arrangements. The government has also agreed a wide-ranging business loan programme with the banks, which is helping to keep companies solvent.

Third, the structure of the economy has been transformed over the past 100 years. In 1920, just 30% of all Swiss employees were employed in the service sector; that figure is now almost 80%. Digital technology has also enabled many sectors to move their operations online over recent decades and, during a pandemic, that is a huge benefit both to service providers and to consumers. Large parts of the country and the economy are in lockdown, but many services can still be generated and delivered online – something that would have been unimaginable during the Spanish flu pandemic.

Almost every second person working from home

This digitalisation of the economy, coupled with many employees’ ability to work from home, is helping to reduce the economic fallout from the pandemic. A representative survey carried out by Deloitte shows that since the COVID-19 outbreak in mid-March, the proportion of Swiss employees working from home for at least half a day a week has almost doubled, from 25% to just under 50%, and so almost half the workforce is now working from home. A more detailed breakdown by sector reveals considerable diversity, however. A sector by sector comparison of the proportion of the workforce working from home with the proportion unable to continue working (and either placed on short-time working compensation or made redundant) shows a marked negative correlation: the more employees are able to work from home in a given sector, the less likely the sector is to shut down operations and make staff redundant.

The chart shows that the most negative impact has been on employees in hotels and catering, where just 14% of the workforce are able to work from home and more than 30% have had to stop working altogether. At the other end of the spectrum is the ICT sector and banking and insurance, where most of the workforce are now working from home and only a small number have been unable to continue working. The health sector is the outlier here – hardly surprising given the special status it has in the front line of the COVID-19 outbreak. Of course, the proportion of the workforce in any given sector able to work from home is not the only factor affecting how many people stop working. Another important factor is whether employees can carry out their work without direct contact with other people. In sectors where this is the case, the Swiss Government’s lockdown decision has, in fact, had very little impact.

To sum up, the severe restrictions placed on the economy in response to COVID-19 are likely to trigger a greater decline in GDP than the Spanish flu pandemic did. However, Switzerland now has modern economic tools that will help the country to cushion the social impact. These include not only unemployment insurance, short-time working compensation arrangements and business loans but also digitalisation and remote-working. Without these tools, the damage to the Swiss economy would undoubtedly be far greater.

This text was published on 14 May 2020 as an opinion article in Finanz und Wirtschaft.