Swiss trade slowly settles after loss of currency peg
The similarity between Switzerland’s and Germany’s economies is enough for the Swiss to call its larger neighbour ‘the big canton’. But it will take another year for the smaller country to pull ahead once more,
If Switzerland’s economic growth is still left in the shade by Germany this week, its central bank knows exactly why.
More than two years after suffering an exchange rate shock that made its exports even more expensive, Switzerland has yet to rediscover its knack of outperforming neighbouring Germany. While the two economies boast significant similarities, prompting the Swiss to call their northern neighbour “the big canton”, forecasts suggest it will only be in 2018 that the smaller country can pull ahead again. Switzerland’s weaker momentum will probably be evident again on Thursday, when first-quarter GDP figures are due. Economists forecast growth of 0.5 per cent for the three months to the end of March, falling short of Germany’s 0.6 per cent.
The strong franc is a problem “we’ve got to get to grips with”, said Juerg Werner, the chief executive of Metall Zug, which makes products ranging from washing machines to wire-cutting devices and hospital sterilisation equipment. “It remains quite difficult, but that is the challenge for Switzerland.” Momentum took a hit when the franc surged against the euro in early 2015 after the Swiss National Bank (SNB) scrapped its cap with the single currency. Profits suffered and companies responded by slashing input costs and jobs, while boosting automation and even moving production abroad.
While aggregate output has since recovered, some companies – particularly in the manufacturing, electrical and metals industries – are still smarting. A study for the SNB’s March policy assessment found that almost 40 per cent of companies rated their use of production capacity as below normal. About the same proportion of company representatives said margins were lower than usual. Some companies have responded to the challenge with innovation. For example, two Swiss brands, Victorinox and Nespresso, teamed up last year to produce a limited edition Swiss army knife with a casing made from recycled Arpeggio coffee pods. Although made in a limited edition, it was popular enough that the companies have announced a follow-up for this year, with the casing this time made from Livanto pods.
Although Switzerland is not a member of the euro area and its population is a 10th of Germany’s, the two closely integrated economies have a lot in common: joblessness far below the regional average, manufacturers that specialise in producing high-quality, technically sophisticated goods and a buoyant residential property market.
The big difference between them is the exchange rate. While the franc has been on an appreciation course for years, a weaker euro has helped Germany’s exporters.
Data from the Organisation for Economic Cooperation and Development shows that the gap between what the Swiss economy could produce and is actually producing widened in 2015, while Germany is performing above potential.
“The franc remains significantly overvalued, inflation is still very low, growth is still relatively low and production factors aren’t fully utilised,” Thomas Jordan, the SNB’s president, said at a private banking event in Zurich this month. “That means we need to continue with our expansive monetary policy.”
In addition to introducing the world’s lowest deposit rate of minus 0.75 per cent, the SNB has pledged to use interventions on the foreign exchange market to counter pressure on the franc. Its next quarterly policy review is scheduled for June 15.
A healthier euro area is likely to benefit Switzerland, since the 19-country region is its biggest destination for exports. While European Central Bank officials are at odds over eventually winding down stimulus, its president, Mario Draghi, has said the bloc’s recovery is increasingly becoming solid and broad-based. Economic data such as the purchasing managers’ index and the Credit Suisse CFA Society Switzerland Indicator are also signalling a Swiss upswing, in line with their German counterparts. Industrial companies recorded a 2.3 per cent yearon-year boost in new orders in the first quarter, while exports “performed well”, rising by 3.9 per cent, according to industry group Swissmem. The IMF expects the Swiss economy to increase by 1.4 per cent this year, just shy of Germany’s 1.6 per cent.
For next year, the IMF is forecasting rates of 1.6 per cent and 1.5 per cent, respectively.
When the Swiss central bankers suddenly removed the cap on the exchange rate with the euro on January 15, 2015, the franc rose by 41 per cent that same day.
This caused major disruption for many companies and investors. Within a day of the move the currency broker Alpari (a sponsor of the West Ham football kit) had said it would fold its UK branch because of heavy client losses.
The Swiss rate cap had been set in September 2011 at 1.20 francs to the euro. Yesterday, after a long and gradual easing since the 2015 shock that briefly put the two currencies at parity levels, it took 1.089 francs to buy a euro.
More than two years after the fact, the Swiss currency shock of 2015 is viewed as a major misstep by the central bank. Last month, when the Czech National Bank (CNB) lifted a similar cap on its koruna against the euro, it had signalled well in advance that it would no longer keep the koruna artificially weak. This prevented a Swiss-like market shock. The koruna rose by about 1.8 against the euro on its first day after the cap was lifted, disappointing speculators who had hoped for a spike.
“If you want to drop a currency peg, then the CNB can show you how to do it,” said Kathleen Brooks, the head of research at brokerage firm City Index in London. “Dismantling a longheld currency regime doesn’t need to be as volatile or panic-stricken as the Swiss peg debacle back in 2015.”
Victorinox and Nespresso produced a popular, limited-edition Swiss-army knife in response to the challenges.