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,

The National - News - Business - - Analysis - Cather­ine Bosley and Alice Baghd­jian write

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.”

Philipp Sch­midli / Bloomberg

Vic­tori­nox and Ne­spresso pro­duced a pop­u­lar, lim­ited-edi­tion Swiss-army knife in re­sponse to the chal­lenges.

Newspapers in English

Newspapers from UAE

© PressReader. All rights reserved.