Strong Swiss Franc Hitting Industry, Commerce and Hotels
Switzerland is likely to avoid recession in 2015 despite the Swiss franc shock. However, industry, retailing/wholesaling as well as hotels and catering are expected to see low to negative growth in sales.
2014 was a good year for the Swiss economy: GDP grew by around 2 percent and was more broad-based than in the preceding years. While the domestic economy continued to slow down, exports picked up more strongly. This more broad-based growth was mirrored in a rise in gross value added across nearly all sectors in 2014. Employment also grew in most sectors, with job creation strongest in the healthcare, social services, education and real estate sectors.
Swiss Franc Shock Will Curb Swiss Economy in 2015
The abandonment of the EUR/CHF minimum exchange rate and subsequent appreciation of the Swiss franc instantly depressed prospects for 2015. Economic momentum is likely to weaken markedly this year, and could actually be negative in individual quarters. A deep recession is unlikely, however. First, the consumer-driven super-cycle – consisting of low interest rates, a growing real estate market, immigration and low inflation – is likely to continue to some extent, if on a weaker scale than in previous years. Second, the recovery in the euro zone and solid growth in the US are likely to mitigate the impact of the strong Swiss franc on the export industries. We expect the Swiss economy to grow by 0.8 percent in 2015.
Stronger Swiss Franc Hitting Industry Prices, Margins and Competitiveness
Generally speaking, the primary effect of the Swiss franc's appreciation on Swiss industrial companies is in terms of prices (nominal). Where sales are generated in foreign currencies, the translation effect causes them to fall in CHF terms (assuming constant prices). This has a direct, negative effect on margins. Normally, price increases to cushion the decline in sales are only possible in less price-sensitive markets and where market positions are very strong. Where exports are billed in Swiss francs, the currency's appreciation instantly makes goods more expensive for foreign customers. This often means it is necessary to adjust prices, since customers are generally unwilling to suddenly pay more for the same product. In this situation, the appreciation of the Swiss franc can be harmful to competitiveness. In sectors with low margins, it is often not possible to adjust prices to the extent required by foreign customers; consequently, foreign demand switches to cheaper foreign products. The Swiss franc's appreciation has also a negative impact on the price of imports. In sectors with a high foreign input share, this has a positive effect on the margin situation. However, competition and the pressure on prices from foreign suppliers in Switzerland are increased and this can lead to a fall in demand for domestic products. Since nearly all sectors of industry are affected by the Swiss franc's appreciation through at least one of these channels, the outlook for industry in 2015 has become significantly more subdued on the whole despite the slight growth in the world's economy. Major differences can be seen from one industrial sector to another, however.
Watches and Pharmaceuticals Less Affected by the Strong Swiss Franc
The watch industry's sales are less affected by the Swiss franc's appreciation than those of other industrial sectors. First, the sector bills only a small portion of its exports in EUR (nearly 70 percent in CHF); second, the key luxury products segment is less price-sensitive than others. In 2015, therefore, waning demand on the part of Chinese customers is much more likely to have a dampening effect on sales than the strength of the Swiss franc. Sales in the pharmaceutical industry, which is also strongly geared toward exports, are slightly more heavily affected by the direct, currency-induced translation effect than those of the watch industry, since around one-third of exports are billed in EUR. But with the industry likely to benefit more than other industrial sectors from cheaper imported goods due to the above-average share of foreign gross value added, the impact on what is already a comfortable margin compared with other sectors is limited. In addition, demand for Swiss pharmaceuticals is likely to remain unbroken; despite weaker sales momentum, the sector therefore remains on an upward trend within its own (real) cycle.
Multifaceted Effects on Mechanical Engineering Sector
The effects of the strong Swiss franc on the mechanical engineering sector are multifaceted given the very mixed nature of the industry. A number of Swiss mechanical engineering firms are leading global niche players with a certain degree of pricing power. Where their exports are billed in EUR, they are likely to be able to push through (EUR) price increases for European customers to some extent without losing a substantial amount of price competitiveness (and therefore orders). The impact of currency appreciation on the sales and margins of these companies is therefore likely to be perceptible, though limited. However, this situation only applies to some Swiss machinery producers; many companies that export to the euro zone undoubtedly do face more intense price competition. As a result of the Swiss franc's appreciation, this part of the sector is affected by price and margin effects but also by a decline in price competitiveness (e.g. for companies where exports are billed in CHF and the margin situation is too poor for price reductions). The latter effect impacts negatively on demand and therefore sales. At overall sector level, demand is nevertheless likely to pick up again slightly during the remainder of the year due to the global economic recovery. This should partially offset the appreciation shock as well as the less dynamic order situation in the second half of 2014.
Metals and Food Industries Suffering from Reduced Competitiveness
Although the metals and food industries are more closely focused on the domestic market than the sectors mentioned above, they too are affected by the Swiss franc's appreciation. The export sector in both cases is more heavily geared toward the euro zone than the watch, pharmaceutical and mechanical engineering industries and tends to be more exposed to price competition. In addition, the domestically oriented part of the metals industry is likely to suffer from the poorer business situation in domestic customer sectors (mechanical engineering, construction) and from stronger competitive pressure from foreign suppliers. In terms of the domestically oriented side of the food industry, the expectation is that greater shopping tourism and stronger international competition on the domestic market will have a dampening effect on demand.
Burden for Hotels, Catering and Retailing, Sales Driver for Automotive Trade
Shopping tourism will likely receive a renewed boost from the stronger Swiss franc. Retailing is therefore likely to see a decline in both prices and nominal sales in 2015. Hotels and catering is likely to experience a clear fall in sales, primarily due to the likelihood of a significantly lower number of overnight stays on the part of European customers. Thanks to major discounting, the automotive trade recorded strong sales figures in February. For sales to rise in overall terms in 2015, sales figures will need to remain very good over the coming months in order to offset a likely continued fall in prices. This is nevertheless within the bounds of possibility.
Construction: Slowdown at a High Level
Construction is not particularly affected by the strength of the Swiss franc at the moment. There are nevertheless signs of a slowdown in activity within the sector, the primary cause being the significant cooling of activity in civil engineering owing to the conclusion of major projects and austerity measures within the public sector. However, there is also evidence of a slight slowdown in growth in structural engineering. This is primarily down to reduced planning activity in the second-homes segment and a mild decline in the construction of owner-occupied homes and office space. The rental apartments market, on the other hand, remains an attractive proposition for investors and there are no indications of a slowdown in construction here.