Swiss economy slowly recovering from exchange rate shock

The pharma industry is the only major Swiss sector immune to the strong franc Keystone

Panic hit the global currency markets two years ago this month when the Swiss central bank unexpectedly stopped pegging the franc to the euro. Key economic sectors like tourism, industry and retail are still struggling to return to steady growth. 

This content was published on January 4, 2017 - 11:00

On January 15, 2015, at 10.29 am, the Euro was exchanging, as it had done for nearly three years, at around a comfortable CHF1.20. A minute later, the Swiss National Bank (SNB) intervened to remove the peg which had been introduced in September 2011 to prevent the overvaluation of the franc against the Euro. 

The result was panic on the markets. In the space of a few minutes, the European currency fell to an historic low of 85 centimes to the franc. Over the following months, the exchange rate stabilised to between CHF1.05 and CHF1.08 to the Euro, due in large part to further intervention from the SNB which discreetly set about buying up foreign currency to ensure the franc did not again flirt with new heights. 

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 For Swiss exporters, the SNB’s move came as a shock. From one day to the next, Swiss exports became 10 to 15% more expensive than their European competitors. Swiss tourism suffered too, with the cost of a holiday in Switzerland now unaffordable for the majority of Europe’s middle classes. And the retail sector was hit hard as the Swiss - ignoring pleas of patriotism from the political class – rushed across the borders to shop for everyday goods at vastly reduced prices. 

Flirting with recession

 An immediate consequence of the economic turmoil was that Switzerland only narrowly avoided falling into recession in 2015. Gross domestic product (GDP) growth for the year reached just 0.8% compared to 2% in 2014. The State Secretariat for Economic Affairs (SECO) spoke of the “painful adaption of the economy to the strong franc”.

 But 2016 has seen Swiss economic activity rebound and GDP growth is forecast to come in at 1.4% for the year.

 “The Swiss economy is slowly coming out of a long period of austerity,” the Zurich-based Swiss Economic Institute reported in October.  

 “In the context of weak European markets, with an overvalued franc and high costs, the Swiss economy is doing quite well,” commented Rudolf Minsch, chief economist at the Swiss Business Federation in December.   

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 However, other experts contacted by warn against premature celebrations. While the Swiss economy is doing better, it is still clearly suffering from the effects of the strong franc, says Veronica Weisser, head of Swiss markets at UBS.

 “There has been a rebound, but it remains incomplete. The unemployment rate will continue to rise over the coming months to reach its highest level in 2017 before coming down again. As for sectors like retailing and tourism, they will probably never recover the levels of activity that they experienced before the euro peg was abolished,” says Weisser, who forecasts Swiss GDP growth will come in at around 2% for 2016 in a monetary context that resembles that from before January 15, 2015.

 CHF20 billion lost annually

 Daniel Lampart, secretary of the Swiss Federation of Unions, talks of more dramatic figures: since 2008, when the franc began appreciating against the euro, some CHF20 billion a year has been lost from Swiss GDP. 

“Sure, there has been an improvement in 2016, but there is still a lot of pressure on key sectors of the Swiss economy like industry, finance or tourism. This persistent situation is very worrying because our country is dependent on the global market to assure salary and employment levels,” says Lampart.

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 According to the unions, tens of thousands of jobs have been lost because of the monetary shock that followed the abolition of the euro peg. Particularly sensitive to global competition, the Swiss machine tool industry has seen the number of employees slashed by 10% since the appreciation of the franc, while simultaneously, employment in the same sector in Germany has grown by 30%. 

“The situation has become critical for numerous small businesses in this sector, as their capacity to resist has been sorely tested. Some sub-contracting businesses are today within an inch from closing down,” says Patrick Linder, director of the Jura Bernese Chamber of Public Economy, a flagship region for the machine tool and high precision industries in Switzerland. 

Swiss pharmaceuticals

 Given these analyses, what can the relatively encouraging Swiss export statistics – the third quarter saw Swiss exports surpass levels achieved before the removal of the euro peg – and the record 2015 trade surplus of nearly CHF37 billion be down to?

 “It’s absolutely down to the phenomenal success of the pharmaceutical industry, a sector which is as immune to variations in the exchange rate as it is to the weakening buying power of the middle class which has hit Asia in particular,” says Sergio Rossi, economics professor at the University of Fribourg. “A foreign consumer can very well do without a watch or a holiday in the Swiss Alps, but if he or she has cancer, they will pay a high price to obtain the best medicine available on the market.”

 Added to the direct effects of the strong franc are other indirect effects linked to the BNS’s moves to introduce negative interest rates in an effort to reduce the attractiveness of the currency. The measure has particularly impacted the banks and the life-insurance sector, which have seen their margins heavily eroded over the last two years.

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