ZURICH: Switzerland is likely to confirm on Friday that it has fallen into its first recession since 2009, the clearest sign yet of the country’s struggles this year with a strong currency.
A Reuters poll of 12 analysts forecasts the $690 billion Swiss economy shrank 0.1 per cent in the second quarter. Unless first-quarter figures are revised up from -0.2pc, the decline would mark the first back-to-back contraction in six years, putting Switzerland into a recession.
Economists expect the downturn to be short-lived, with the fallout from the Swiss National Bank’s (SNB) decision in January to abandon its cap on the franc less severe than first feared.
“You do see that the strong Swiss franc is having its toll on the Swiss economy, but at the end of January we thought the results would be even more devastating,” said Jan-Egbert Sturm, a director of the KOF Swiss Economic Institute think tank.
The franc soared after the SNB lifted its limit on its value of 1.20 to the euro, in place since September 2011. The cap was put in place largely to protect the export-reliant economy, and the currency’s gains led economists and the SNB to slash growth forecasts.
After strengthening to as much as 0.85 francs per euro just after the SNB announcement, the franc has pared gains and now trades around 1.08 francs per euro.
Ending the cap, which the SNB said was too expensive to maintain, has come at a cost to Switzerland’s economy. Companies have eliminated jobs, frozen or cut pay, increased working hours, slashed prices and accepted lower margins to cope with the damage.
The strong franc has also dissuaded tourists from visiting Switzerland, while shops along the border have seen bargain hunters head to neighbouring France, Germany and Italy.
Watchmakers like Swatch and Richemont have been among the hardest hit, since most of their parts must be manufactured locally to carry the coveted “Swiss Made” label.
However, the domestic economy, supported by a booming housing market and negative interest rates, has helped pick up the slack from industries hurt by the exchange rate. Purchasing power has risen as consumer prices have fallen the most since 1959, while payrolls rose in the second quarter.
“Overall, it’s not feeling like a real recession,” said Daniel Kalt, chief economist for Switzerland at Swiss bank UBS.
“It’s a slight recession because the domestic side of the economy buffers most of the exchange rate shock that we’ve seen.”
Economists said it is too early to say what impact China’s slowdown might have on Switzerland, but a weakening franc, coupled with a brighter outlook for eurozone demand, mean many predictions are for overall growth in 2015.
As the Neue Zuercher Zeitung newspaper wrote: “Certainly the franc shock has left ugly scratches on the Swiss paint job. But apart from that, Herr and Frau Switzerland cannot complain.”
Published in Dawn, August 27th, 2015
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