Franc fall­out: First Swiss re­ces­sion in six years

The Pak Banker - - COMPANIES/BOSS -

The Swiss Na­tional Bank may see the fall­out from its dra­matic pol­icy u-turn de­liv­ered in one word this week: re­ces­sion. Seven months af­ter the cen­tral bank scrapped its cur­rency cap, Switzer­land is deal­ing with de­clin­ing ex­ports, stag­nant man­u­fac­tur­ing and plung­ing prices. Econ­o­mists forecast gross do­mes­tic prod­uct shrank 0.1 per­cent in last quar­ter, a sec­ond con­sec­u­tive con­trac­tion that would mark the first re­ces­sion in six years. The data are due on Fri­day.

Much of the pres­sure on the econ­omy is com­ing from the franc, which has ap­pre­ci­ated 11 per­cent ver­sus the euro since the cen­tral bank's un­ex­pected Jan. 15 de­ci­sion to opt for a free float. For SNB Pres­i­dent Thomas Jor­dan, who has de­fended the pol­icy move, the weaker near-term back­drop will feed into his as­sess­ment when of­fi­cials gather in three weeks for their quar­terly pol­icy meet­ing.

"It was a ma­jor move in the cur­rency -- so it's not re­ally so sur­pris­ing that ex­ports are suf­fer­ing," said Ana­toli An­nenkov, se­nior economist at So­ci­ete Gen­erale SA in Lon­don. "But maybe where we're see­ing more weak­ness than we'd thought is in in­vest­ment and pri­vate con­sump­tion." Switzer­land's slump may be short lived, with a sep­a­rate sur­vey pre­dict­ing growth of 0.1 per­cent this quar­ter and 0.2 per­cent in the last three months of the year.

The econ­omy could get a boost from a weaker cur­rency and a drop in the price of oil. With Greek risks hav­ing abated and the euro area no longer at risk of im­mi­nently splin­ter­ing, the franc has de­pre­ci­ated more than 3 per­cent since the end of June. The franc traded at 1.07784 per euro at 3:10 p.m. in Zurich on Wed­nes­day.

"Our mon­e­tary pol­icy is tak­ing the cur­rent dif­fi­cult sit­u­a­tion into ac­count," Jor­dan said in an in­ter­view with Un­ternehmerZeitung last week. "We ex­pect the econ­omy to re­turn to a growth path in the sec­ond half of the year."

In tan­dem with giv­ing up the min­i­mum ex­change rate in Jan­uary, the SNB cut its de­posit rate to a record low of mi­nus 0.75 per­cent and pledged cur­rency in­ter­ven­tions as needed. Its next rate de­ci­sion is on Sept. 17, and Jor­dan said that a pol­icy change isn't im­mi­nent.

While ex­pan­sion is pro­jected to re­sume, sur­veys in­di­cate a sub­dued re­cov­ery. A man­u­fac­tur­ing in­dex has sig­naled con­tracted al­most ev­ery month this year and con­sumer con­fi­dence de­clined to its low­est in more than three years in July. The slow­down in China could also ham­per growth, just as euro- area de­mand ex­pe­ri­ences a mod­est re­vival. Swiss com­pa­nies have been look­ing to Asia to off­set weak­ness in Europe, with Switzer­land clinch­ing a free-trade agree­ment with the world's sec­ond-largest econ­omy last year.

"The big risk fac­tor is how China ef­fects global de­mand," An­nenkov said. The SNB in June forecast eco­nomic growth of "just un­der" 1 per­cent in 2015. It sees con­sumer prices fall­ing 1 per­cent this year and 0.4 per­cent in 2016, with the an­nual in­fla­tion rate turn­ing pos­i­tive only in 2017.

In the first half, Swiss ex­ports sank by a nom­i­nal 2.6 per­cent. Ship­ments to the euro area, which ac­count for 44 per­cent of sales abroad, dropped 8 per­cent.

Ex­ports of watches to eight lead­ing Asian mar­kets de­clined in July, with China tum­bling al­most 40 per­cent. Over­all ex­ports to China fell 1.7 per­cent last month.

"The franc's 10 per­cent rise hurts, but for­eign de­mand is more im­por­tant and we see cer­tain signs of life in the euro area," said David Marmet, economist at Zuercher Kan­ton­al­bank in Zurich. "The Swiss econ­omy has shown in the past that it's very com­pet­i­tive."

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.