UBS Outlook Switzerland – Wages are lagging behind inflation

Zurich, 8 November 2022 – In the annual Compensation Survey by the Chief Investment Office of UBS Global Wealth Management (UBS CIO GWM), 290 surveyed companies expect a nominal wage increase of 2.2% in 2023. Nominal wages next year are therefore likely to record their highest increase in almost 15 years and significantly exceed the wage agreements of 1.1% in 2022.

A nominal wage increase is expected in both 2022 and 2023 for each of the 22 sectors covered. According to the survey, the highest wage agreements of 3% are recorded in the wholesale trade, IT, and telecommunications sectors, along with the area of watches and jewelry. Employees in the tourism and hospitality sectors, which are benefiting from a strong post-pandemic recovery, will be pleased to see a likely increase in wage of 3%. The metals and textiles industries, along with the media sector, among others, bring up the rear in this year’s wage negotiations. Nonetheless, these three sectors should also see a robust nominal wage growth of around 2%.

UBS economists are forecasting inflation of 2.9% this year, which translates into an average real wage loss of 1.8%—the sharpest decline since 1942. Three out of four surveyed companies are meeting demand for wage compensation to offset the inflation shock in this year's wage negotiation. However, only 20% are fully offsetting it. With inflation of 2.1%, as expected by UBS CIO GWM, real wages on average in 2023 are likely to be almost stagnant.

On the one hand, the restraint exercised in wage agreements implies that companies expect inflation to calm down next year. On the other hand, the deteriorating economic outlook for companies is preventing stronger wage growth.

Even if Switzerland avoids a major shortage of gas and electricity, the sharp increase in energy prices and weak European economic growth will weigh heavily on the Swiss economy in the winter, leading to stagnation or even a slight recession. Moreover, the uncertainties surrounding energy supply are unlikely to be limited to this winter alone. Another difficult winter situation, and therefore a fragile Swiss economy, is expected in 2023–24.

However, the UBS economists don’t anticipate a severe recession. Firstly, households can partially fall back on savings accumulated during the COVID-19 pandemic to compensate for the loss in purchasing power. Secondly, a robust Swiss labor market is supporting the economy. UBS CIO GWM expects GDP growth of 2.1% in 2022 and 0.4% in 2023. However, the Swiss economy would likely contract significantly in the event of an energy shortage.

Besides the energy crisis, the wage-price spiral—which would drive up inflation further—represents another central risk for the economy. “Employees are hardly likely to celebrate wage increases of just over 2%, which is well below current inflation levels. However, the restrained wage increase should help prevent a wage-price spiral and is unlikely to further fuel inflation,” UBS Chief Economist Daniel Kalt explains.

The UBS economists expect energy prices to stabilize and for the pandemic-related supply bottlenecks to gradually decrease, which should be reflected in easing prices for imported goods. In the second half of next year, the Swiss National Bank (SNB) should leave rates unchanged as inflation moderates and the economy slows. However, in the short term, the SNB remains focused on inflation that is currently running too high and is expected to raise key rates to 1.5% until March 2023.

Besides inflation, companies also face a labor shortage. According to the UBS survey, four out of five companies are having difficulties recruiting employees. The lack of staff has also become more widespread. While only 17% of respondents said they had problems filling vacancies in more than one out of six business sectors in 2016, this figure has climbed to 50% in 2022. “We aren’t only seeing an increasing shortage of specialized staff, but a shortage in the workforce in general,” says UBS economist Florian Germanier. The majority of the companies (63%) see demographic change as the main reason for the mounting staff shortages, meaning staff recruitment will likely remain an ongoing challenge. So, while real wages are under pressure in the short term, they are expected to rise in the long term as these labor shortages worsen.

UBS Switzerland AG