The shock of inflation this year is hitting Swiss wages hard, leading to the worst loss in real terms in 80 years. What lies ahead?

This year, Swiss wage agreements gave employees a 1.1 percent wage increase, but with forecasts for inflation of 2.9 percent from UBS economists, real wages are down 1.8 percent, which is the biggest decline since 1942, according to a wage study from UBS.

Offsetting Inflation

Of the companies surveyed by UBS, around 75 percent are meeting demands for compensation to offset inflation, but only 20 percent fully offsetting it. 

Next year, UBS economists see inflation moderating to 2.1 percent annually, and with a nominal increase of 2.2 percent seen for wage agreements next year, average real wages will be stagnant on average. 

If there is a silver lining in this, wage restraint will help put the brakes on overall inflation. 

«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,» according to UBS Chief Economist Daniel Kalt.

Financial Sector

The financial services sector is broadly in line with the average for the whole of Switzerland. For this year, the effective wage increase was 1.0 percent, marginally below the country average of 1.1 percent. For 2023, wage agreements in the sector are expected to increase by 2.2 percent, the same as the national average.

The wage restraint is an indication that companies expect inflation to moderate next year, with the outlook for a slowdown in economic growth also weighing on increases

The highest increases for next year are expected to be 3.0 percent for the wholesale trade, watches and jewelry, and IT and telecommunications. The lower end of the spectrum can expect a nominal wage increase of 2.0 percent and includes industries such as corporate services, which include real estate, construction, and media services, among others.

Staffing Shortages

On the flip side, upward wage pressure is likely to come from staffing shortages, with four out of five companies indicating difficulty in recruiting employees. That trend is also becoming more widespread. In 2016, 17 percent of respondents reported difficulty filling vacancies, with that climbing to 50 percent this year.

A majority of firms cite demographic changes as increasing staff shortages, suggesting that staff recruitment will remain a challenge. While real wages are facing short-term downward pressures, they are expected to rise over the long term as labor shortages worsen, according to the report.

«We aren’t only seeing an increasing shortage of specialized staff, but a shortage in the workforce in general,» says UBS economist Florian Germanier.

No Recession

UBS economists don't expect a recession in Switzerland either this year or next, with GDP growth of 2.1 percent predicted for 2022 and 0.4 percent for 2023. There is some resiliency because households can fall back on accumulated savings during COVID to compensate for a purchasing power loss. Moreover, a «robust» labor market is also supporting the economy, according to the report.

That outcome is predicated on developments in the energy sector. «The Swiss economy would likely contract significantly in the event of an energy shortage,» the economists warned.