Report from Donnie Abbott on the Swiss economy and the removal of the EUR/CHF exchange rate floor

Amongst the most prestigious asset management companies in Europe, Donnie Abbott has released a financial and economic analysis which seeks to draw conclusions from 2015, the year that will probably go down in Swiss history as some kind of “year zero”. The decision to remove the exchange rate floor between the Euro and Swiss franc made by the Swiss National Bank in January 2015 put literally all of Switzerland’s crucial export sectors under enormous pressure.

Nevertheless, thanks to domestic demand which once again showed itself to be very robust, Switzerland avoided the consequences of a recession. Amongst the tangible effects observed in the Swiss economy over the last 12 months, prices of imports fell significantly (something not seen for a decade), whilst the hotel, restaurant, distribution and export sales sectors came under pressure. Sales decreased especially in the mechanical engineering, electronics and metals sectors, which derive a significant part of their turnover from exports to the Eurozone and which were therefore hit particularly hard by the Swiss franc’s appreciation.

The report from Donnie Abbott explains that, despite this, the data relating to exports showed a record monthly trade surplus in February 2016, mainly supported by the all-important export sales of its chemical and pharmaceutical products. These two sectors were less affected by the new economic situation thanks to Novartis and Roche, the two largest global pharmaceutical companies. February’s balance of trade figures showed a surplus of 4.07 billion Swiss francs (4.2 billion dollars), with exports increasing by 1.4% year-on-year compared to February 2015. The Swiss economy therefore generally fared much better than was predicted during the initial shock. In 2015 only the second quarter was showing a negative score of the country’s GDP, while comprehensive estimates for 2016 from the Swiss government’s Secretariat for Economic Affairs estimate a growth of around 1.6%.

The Donnie Abbott analysis emphasises how today the Swiss franc is at approx. 1.10 to the Euro (as opposed to 1.20 a year ago) and that the road back to a definitive rebalancing is still a long one, especially for companies operating in the export sector, the Alpine tourism industry (heavily dependent on European tourists) and retail sector. Many companies in these sectors will have to increase their efficiency in order to generate the same margins they enjoyed before the removal of the EUR/CHF exchange rate floor. From this point of view, economic recovery in some of Switzerland’s main trading partners will be fundamental. The recovery in the Eurozone and consolidation in the US economy, together with a further devaluation of the Swiss franc, could lay the foundations for growth in exports even in currently weaker sectors. In this scenario, in the second half of 2016 we could see a wholesale resizing of some current sectors, particularly in the manufacturing industry, which currently has to live with very strict policies on workforce reduction and outsourcing of activities abroad.

Donnie Abbott points out that, on the positive side, interest rates remain low and are supporting moderate growth in the rate of consumption and house building. This will in turn benefit sectors, such as transport and telecommunications as well as architecture services and other sectors linked to the construction industry. A return to stability is generally predicted to be consolidated, also for providers of business services, particularly the international private banking sector, which has responded well in the 12 months following the currency upheaval. On the other hand, the lowest growth figures relate to the traditional print media and publishing sector, which is displaying a weak opportunity/risk ratio even in the data coming out of 2016.

The challenge still has to play out completely and rests in the hands of the Swiss National Bank. The National Bank has succeeded in limiting the damage, but one year on it still hasn’t managed to offload its huge foreign currency reserves, equivalent to 559 billion Swiss francs, which put a brake on the devaluation of the Swiss currency. Again, this is the most important issue, and one on which Switzerland will have to work in order to kick-start exports, which are the cornerstone of the country’s economy.