Swiss economy defies doomsayers, weathers franc shock

By Alice Baghdjian

ST. GALLEN, Switzerland (Reuters) – When the Swiss central bank abandoned its cap on the franc back in January, corporate Switzerland warned of an economic “tsunami” that would hit exports, hammer jobs and plunge the Alpine nation into a deep recession.

Four months later, however, the country appears to be holding up better than the doomsayers had predicted.

At an annual gathering of business leaders in St. Gallen this past week, Swiss firms said they were weathering a sharp rise in the Swiss franc’s value against the euro since the cap was scrapped by adjusting prices, emphasizing new markets and seeking more flexible hours from staff.

A strong dollar has helped cushion the blow for some firms and those that import intermediate goods from the euro zone have actually benefited from the franc strength.

There are sectors of the economy, notably tourism and machinery firms with a franc-heavy cost base and high sales exposure to Europe, that are struggling.

Swissmechanic, an employers’ association for companies in the machinery, electronic and metalworking sectors, says that some 2,000 jobs have been axed in the sector since the Swiss National Bank (SNB) shocked financial markets in mid-January.

But many firms say previous episodes of franc strength, for example in 2011 before the SNB introduced the 1.20 franc per euro ceiling, forced them to be nimble, and that has helped them weather the storm.

“Many companies have learned from 2011, many saw that if they have a concentration of risk, whether it’s in distribution, customer base, or the product, then it’s a major risk,” Tobias Gerfin, CEO of Swiss kitchenware firm Kuhn Rikon, told Reuters in St. Gallen.

“We are going to raise prices in Europe, we’ve increased weekly working hours from 40 to 42 hours, we have taken measures, but the situation is not so bad that I can’t sleep at night,” he said.

A stronger currency makes it more difficult for firms to compete on price abroad. Switzerland’s strong economic links to the euro zone make the franc-euro exchange rate the most important for Swiss firms.

Still, despite the fact that the rate is now close to parity, with one euro buying roughly 1.04 francs, the hard economic data has been encouraging.

ECONOMY SEEN GROWING

Swiss exports ticked up in March compared to the prior year, buoyed by sales to the United States, Middle East and Asia. And consumption appears to be holding up well thanks to a resilient tourism sector and a rise in car purchases.

“Besides the obvious shock to exports, consumption and investment that has hit the economy, households and industry seem to be flexible enough to weather the storm,” said Karsten Junius, chief economist at bank J. Safra Sarasin.

Although he expects the economy to contract by 0.2 percent in the first quarter, he sees growth of 0.7 percent for the full year. Economists at the Zurich-based KOF institute are also forecasting modest growth in 2015, having previously predicted a 0.5 percent contraction for this year in the immediate aftermath of the SNB decision.

Eva Johnston, head of a Lausanne-based firm Eva J. that makes high-end natural cosmetics, told Reuters she had given up trying to compete with rivals in Europe and instead focused her energy on the home market.

    “When we saw the franc appreciating, our strategy was to strengthen our position on the domestic market, rather than to try to achieve a competitive position in neighboring countries,” said Johnston.

    “We are not actively selling in stores in Germany and France – the biggest cosmetics markets in Europe – because the competition now in terms of the pricing is humongous.”

Johnston says strong demand in Switzerland and the reduced cost of imported ingredients from Europe have allowed her to continue to manufacture at home instead of shifting to lower cost production sites.

But Nick Hayek, chief executive of watch group Swatch <UHR.VX>, worries that the strong franc could force others to shift production abroad, posing a “latent threat” to Swiss prosperity.

Unemployment has ticked up slightly, albeit from very low levels, over the past months. And the KOF’s employment indicator fell to its weakest level in more than five years in April.

“Everything that accelerates deindustrialization is very dangerous for a country,” said Hayek, who was highly critical of the SNB decision back in January, warning of a “tsunami” for the broader economy.

In March, however, he described the outlook for Swatch as “excellent”, saying turnover in Japan, Switzerland and many European countries was growing at double-digit rates.

(Editing by Noah Barkin and Gareth Jones)

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    May 19, 2015 at 2:26 am

    […] Swiss economy defies doomsayers, weathers franc shock Eva Johnston, head of a Lausanne-based firm Eva J. that makes high-end natural cosmetics, told Reuters she had given up trying to compete with rivals in Europe and instead focused her energy on the home market. “When we saw the franc appreciating, our … Read more on Bankless Times […]

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