Franc Fallout: First Swiss Recession in Six Years

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Swiss GDP

The Swiss National Bank may see the fallout from its dramatic policy u-turn delivered in one word this week: recession.

Seven months after the central bank scrapped its currency cap, Switzerland is dealing with declining exports, stagnant manufacturing and plunging prices. Economists forecast gross domestic product shrank 0.1 percent in last quarter, a second consecutive contraction that would mark the first recession in six years. The data are due on Friday.

Much of the pressure on the economy is coming from the franc, which has appreciated 11 percent versus the euro since the central bank’s unexpected Jan. 15 decision to opt for a free float. For SNB President Thomas Jordan, who has defended the policy move, the weaker near-term backdrop will feed into his assessment when officials gather in three weeks for their quarterly policy meeting.

“It was a major move in the currency -- so it’s not really so surprising that exports are suffering,” said Anatoli Annenkov, senior economist at Societe Generale SA in London. “But maybe where we’re seeing more weakness than we’d thought is in investment and private consumption.”

Switzerland’s slump may be short lived, with a separate survey predicting growth of 0.1 percent this quarter and 0.2 percent in the last three months of the year.

Currency Weakens

The economy could get a boost from a weaker currency and a drop in the price of oil. With Greek risks having abated and the euro area no longer at risk of imminently splintering, the franc has depreciated more than 3 percent since the end of June. The franc traded at 1.07784 per euro at 3:10 p.m. in Zurich on Wednesday.

“Our monetary policy is taking the current difficult situation into account,” Jordan said in an interview with UnternehmerZeitung last week. “We expect the economy to return to a growth path in the second half of the year.”

In tandem with giving up the minimum exchange rate in January, the SNB cut its deposit rate to a record low of minus 0.75 percent and pledged currency interventions as needed. Its next rate decision is on Sept. 17, and Jordan said that a policy change isn’t imminent.

While expansion is projected to resume, surveys indicate a subdued recovery. A manufacturing index has signaled contracted almost every month this year and consumer confidence declined to its lowest in more than three years in July.

‘Very Competitive’

The slowdown in China could also hamper growth, just as euro-area demand experiences a modest revival. Swiss companies have been looking to Asia to offset weakness in Europe, with Switzerland clinching a free-trade agreement with the world’s second-largest economy last year.

“The big risk factor is how China effects global demand,” Annenkov said.

The SNB in June forecast economic growth of “just under” 1 percent in 2015. It sees consumer prices falling 1 percent this year and 0.4 percent in 2016, with the annual inflation rate turning positive only in 2017.

In the first half, Swiss exports sank by a nominal 2.6 percent. Shipments to the euro area, which account for 44 percent of sales abroad, dropped 8 percent.

Exports of watches to eight leading Asian markets declined in July, with China tumbling almost 40 percent. Overall exports to China fell 1.7 percent last month.

“The franc’s 10 percent rise hurts, but foreign demand is more important and we see certain signs of life in the euro area,” said David Marmet, economist at Zuercher Kantonalbank in Zurich. “The Swiss economy has shown in the past that it’s very competitive.”

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