Pictet: Switzerland - Darkest before the dawn

Switzerland is set to suffer from a one-two punch of recession and deflation this year, but the Swiss National Bank’s ultra-easy monetary policy and a pick-up in the neighbouring euro zone’s growth are likely to lead an economic rebound in 2016 and onwards.

After the SNB’s shock decision to remove the three-year-old cap on the CHF on January 15, economic indicators coming out of the Alpine country have been universally negative.

The KOF economic barometer, which gives an indication of the likely performance of the economy in six months’ time, posted its biggest fall since 2011 in February. Retail sales dropped 2.1 per cent on the month in January, even though shops slashed prices after the controversial ceiling removal.The central bank’s move to cut the benchmark Libor policy rate to -0.75 per cent – among the lowest in the world – is unlikely to shield the export-oriented economy. According to our estimate, monetary conditions have tightened by the equivalent of an interest rate hike of about 250 basis points, even taking into the account the SNB’s latest policy easing.

Swiss exports, which have remained resilient so far thanks to their high value-added nature, are about to deteriorate as manufacturers pass on the effect of currency appreciation. Our calculations show that the cap removal will have a net negative impact on GDP growth of about 2 percentage points this year, while it should increase the unemployment rate by 1 to 2 percentage points and lower inflation by 1.5 percentage points. We expect the economy to shrink by 0.4 per cent this year, after expanding 1.9 per cent last year. Consumer prices are likely to fall by 1.5 per cent, in our view, before rising again by 0.8 per cent in 2016.

We estimate that the CHF is currently overvalued against the EUR by a significant 15 per cent and 11 per cent on trade-weighted terms.

SNB and cantons

However, the economic situation is unlikely to deteriorate much further beyond 2015. Having come under fire for abandoning the cap so unexpectedly – a decision which we understand was taken under some political pressure – we think the SNB is keen to support the economy by easing monetary policy further, and to regain its credibility.
We feel the central bank prefers to use the benchmark Libor rate extensively as the key instrument of monetary policy than to intervene in currency markets, in order to avoid a further increase in foreign exchange reserves – which already stand at a record high level of CHF509 billion, or 78 per cent of GDP.

This is a politically sensitive issue – especially ahead of an October election -- and partly explains why the SNB had to abandon the cap in the first place, in our view.
Continued currency interventions to keep the CHF below the cap would have hurt profits on foreign holdings, which are the key source of funding for the country’s 26 cantons – the SNB’s biggest shareholders that traditionally receive transfers from the central bank.

Die vollständige Analyse im pdf-Dokument