The Swiss economy has skirted a recession after the EUR/CHF shock at the beginning of 2015.

The booming domestic economy is acting as a buffer, absorbing the bumps and jolts in export sectors created by the strong Swiss franc. Yearly immigration of roughly 1% of the population, together with the Swiss National Bank’s still super-loose monetary policy stance will continue supporting consumption and construction spending.

Net exports and investment spending will, however, weigh on real GDP growth, which we expect to come in at 1.4% in 2016. Consumer prices, already down 1.2% in 2015, will likely retreat further, but at a lower rate as the base effects from lower oil prices and a strong currency are expected to fade only slowly. No reason, though, for the SNB to tighten its policy stance anytime soon.

Like its neighbors, Switzerland faces a tough demographic transition. While government debt is not a major problem, pension liabilities are, and the recent approval of anti-immigration policies leads us to question how an isolationist Switzerland might fare in the future.

Without net immigration, we forecast that the Swiss working population could decline by almost 25% by 2050, forcing higher retirement ages, and lower public spending. The country, along with many others in Europe, will face a difficult choice between higher migration and weaker growth.

Despite having probably the strongest currency on Earth, Switzerland’s economy has outpaced all its European neighbors in terms of economic performance over the last 10 years. Most of this outperformance can be explained by strong immigration. Switzerland witnessed a surge in demand for qualified workers during the boom years shortly before the financial crisis. With the free movement of per- sons in 2007 came an annual influx of foreign workers of roughly 1% of Switzerland’s population. This boosted the domestic economy, especially housing construction and consumer demand. Increased immigration also helped mitigate some of the emerging demographic challenge of financing the pay-as-you-go pillar of the Swiss pension system.

The flipside of these developments has been the increasing feelings of unease about the side-effects of immigration. The so-called “mass-immigration initiative,” narrowly passed in a referendum in February 2014, calls for the reintroduction of a quota- based immigration policy. Switzerland must implement this initiative by February 2017, but it remains to be seen whether the country will pursue the isolationist economic policy described in the initiative or maintain the current, more open approach of economic integration. To consider possible outcomes, we have run several long-term simulations of the Swiss economy, mapping out the likely path of economic output, population size and other variables until 2050.

The first scenario assumes a rather mild reduction in immigration to Switzerland. The second looks at a strict implementation of the mass-immigration initiative, assuming that a combination of the new quota system and lower demand for foreign workers leads to zero net immigration throughout the simulation period. To counter the likely fast deterioration in the country’s demographics, an increase in Switzerland’s retirement age may become unavoidable.

We have therefore run a third scenario in which we look at a step-wise increase of the retirement age from currently 65 to as much as 69 starting in 2025. According to the results of our base scenario, the Swiss population should increase from today’s roughly eight million to around 10 million in 2050. This corresponds to an average yearly growth rate of 0.5% starting from the current, immigration driven 1% and then gradually declining over time. The implicit assumption in this base case is a rather mild curb on immigration which would correspond to a rather flexible implementation of the mass-immigration initiative. If we assume productivity growth of 1.1% over the long run, it would allow the Swiss economy to continue growing at between 1.5% and 1.7% over the next 35 years and would lift the country’s real annual GDP from the current CHF 650bn to CHF 1.1trn by 2050. In terms of the demographic implications of this scenario, the working age population would increase a bit from currently 5.6 million to 5.7 million. That means that the share of working age people in relation to the total Swiss population would decline from today’s 67% to around 57% in 2050. The challenge of financing the Swiss pension system will be substantial even when allowing for immigration to mitigate the demographic trends. Our zero net-immigration scenarios would correspond to a strict implementation of the mass-immigration initiative, meaning a reduction in immigration to the point that net immigration is zero for the foreseeable future. In this case Switzerland’s population would peak at around 8.45 million in 2028 and then gradually decline to below eight million toward 2050. This would have dramatic implications for the working age population, which would start to decline within a few years, falling from its current 5.6 million (or 67% of the population) to below 4.3 million (or 53%) by 2050. Faced with such a decline and assuming the same productivity growth of 1.1% over the long run, Swiss annual real GDP would increase from the current CHF 650bn to only CHF 880bn, a considerably lower resource base from which to finance pensions and other public expenditures compared to the base case described above.

These problems could be addressed by increasing the pension age. In our simulation we increased pension age gradually to 69 years starting in 2025. This would push out the decline in the working population to 2030, but it would not stop its gradual decline thereafter. The simulations show that Switzerland will face some tough choices when deciding the course of immigration and foreign policy over the next two-to-three years. The ideal policy to deal with its demographic challenges might turn out to be a mix of all measures: tolerating some immigration while gradually increasing the retirement age.