SWITZERLAND: Swiss franc and foreign trade under pressure

The 2019 GDP-growth outlook remains modest (1.3%), despite a robust growth in the first quarter (+0,6% q/q), mainly supported by private consumption (thanks to strong labour market) and capital investment. This growth weakened significantly in the second quarter. The global economy weakening and the strengthening of the franc against the euro are restraining foreign trade with further considerable uncertainty on investment activities.

The manufacturing PMI fell into contractionary territory in April and further tumbled to a near seven-year low in July (44,7), while the KOF economic barometer deteriorated during the quarter. Corporate sentiment is progressively deteriorating and giving a clear sign of slowing growth. Meanwhile, a sharp contraction in retail sales in May states decreasing private consumption in the 2nd quarter, although a falling unemployment rate should cushion a slowdown. Robust private spending and recently approved corporate-tax reforms should sustain growth.

Disagreements with the EU over the stalled framework agreement, designed to more closely align Swiss and EU regulations, led the EU to let Switzerland’s stock-exchange equivalence expire on June 30. Eventual dispute with the EU presents a key downside risk to the business confidence and the outlook.

A 0.6% inflation rate is expected for the whole year, in line with its level since the beginning of this year. Yields on Swiss government bonds fell to their lowest level since 2016.  

The economy grows below the long-term trend and political uncertainty due to trade tensions persists. The Swiss National Bank (SNB) should not raise interest rates unless the ECB does so first. Interest rates should remain unchanged until 2021. Since the trend in interest rates remains unclear, the franc should weaken only slightly against the euro over the next 12 months after the appreciation of this summer (from 1.14 to 1.09 CHF/€) which caused the SNB interventions in currency markets.

September 2019