I. ECONOMIC ENVIRONMENTIntroductionSince the last Trade Policy Review of Switzerland and Liechtenstein, in 2000, Switzerland has gone through a period of persistent economic stagnation and even recession in 2003, from which it is beginning to recover. The stagnation, which affected all major sectors of the economy, can be linked to both domestic and external factors. Domestic elements included deterioration of the fiscal situation, with a considerable structural decline in revenue, and a sharp, if temporary, tightening in monetary policy in 2000-01. External factors included the persistent weakness of the world economy, especially the slow pace of growth in the European Union, Switzerland’s main external partner, and the effects of the global downturn on finance, capital goods, and tourism. At present, Switzerland’s economic situation is improving, supported by budgetary consolidation and strongly growth-supportive monetary policy (section (2)(i) below). Switzerland’s position outside the expanding European Union and European Economic Area also contributed to its slow economic growth in the recent past. This situation is, hopefully, being corrected through the conclusion of the two sets of bilateral agreements with the EU (Chapter II).By contrast, Liechtenstein’s economy grew substantially in the period up to 2000, although a downturn occurred in 2001: later data are not available. Investment has flowed in, the budgetary situation is healthy, and employment has increased considerably in relation to the small size of the economy, with substantial inward cross-border commuting. This striking difference from Switzerland can be clearly linked to Liechtenstein’s membership of the European Economic Area since 1995 (Chapter II), and the resulting changes that have taken place in its economic structure (section (2)(ii) below).Switzerland and Liechtenstein remain among the richest countries in the world. However, Switzerland’s position has fallen back when purchasing power parities (PPP) are taken into account. The IMF notes that in 1994, Switzerland was in fourth position in terms of GDP per head (based on PPP) behind Luxembourg, Norway, and the United States. In 2003, Ireland, Denmark, Canada, Austria, and Iceland were also estimated to have higher GDP per capita in PPP terms than Switzerland. In nominal terms, GDP per person employed in Liechtenstein is estimated to be approximately 40% higher than in Switzerland.The structural differences between the two economies partly reflect their relative sizes, but also the evolution that has taken place in the recent past. In 2002, services accounted for some 70% of the Swiss GDP, manufacturing around 19%, and agriculture about 2%. For Liechtenstein, the share of services is around 60%, and that of manufacturing, some 40% (Table I.1). Within the services sector, tourism and finance are the main motors of growth in Switzerland, and finance the principal contributor in Liechtenstein. Manufacturing in both countries is becoming increasingly oriented towards high-technology, high-value-added industries. Table I.1Switzerland and Liechtenstein at a glanceSwitzerland(2002)Liechtenstein(2001)Area (km2)41,285160Resident population ('000)7,368.033.9aGDP total (Sw F billion, current prices)431.13.8bGDP per capita (Sw F)58,509.8111,540bShare of real GDP at market pricesc Agriculture1.3.. Mining and quarrying0.2.. Manufacturing19.439.0 Electricity, gas and water2.5.. Construction5.6.. Services71.060.0 Trade, restaurants, hotels15.5.. Transport and communications6.1.. Finance, insurance, real estate, R & D23.230.0Share of employment by sectora Agriculture5.11.3 Mining and quarrying0.10.2 Manufacturing17.435.6 Electricity, gas and water0.60.7 Construction7.58.4 Services69.253.9 Trade, restaurants, hotels21.010.7 Transport and communications6.63.8 Finance, insurance, real estate, R & D5.316.4.. Not available.