The Franc Shock Was Particularly Severe for SMEs
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The Franc Shock Was Particularly Severe for SMEs

The sentiment of SMEs is, for the most part, not dependent on political events. However, the case of abandoning the EUR minimum exchange rate was different. The subsequent strength of the franc caused long-lasting problems for small and medium sized enterprises.

Political decisions hardly exert any direct influence on the assessment of the business situation by small and medium-sized Swiss industrial enterprises. However, SMEs recovered less quickly from the franc shock back in 2015 than large industrial enterprises did.

Disturbances in Exchange Rates and Economies Usually Weaken SMEs More

The business situation of Swiss industrial enterprises as measured by the indicator of the KOF Swiss Economic Institute (KOF) is influenced by political and monetary policy decisions (see Figure 1). The assessment of the business situation fluctuates considerably more sharply due to cyclical and exchange rate-related disturbances than due to political decisions.

Only large enterprises display a reaction following political events: Their assessment clouded over following the acceptance of the mass immigration initiative (MII), the rejection of Corporate Tax Reform III (CTR III), and the acceptance of the Brexit referendum. However, these downturns were not especially marked and could well be attributable to other factors. Furthermore, there was practically no change in the assessment of small and medium-sized enterprises (SME).

Political decisions barely influence sentiment at SMEs

Fig. 1: Political decisions barely influence sentiment at SMEs

KOF business situation indicator (industry): Balance in percentage points.
Source: KOF Swiss Economic Institute (KOF), Credit Suisse

Franc Shock Hit Small Players More than Large Ones – Only Now Are SMEs Recovering

There is a completely different situation in particular regarding one specific monetary policy decision: The business situation indicator has rarely responded as clearly as it did in February 2015 after the Swiss National Bank had abandoned its EUR minimum exchange rate. The collapse in the assessment of the business situation was similarly strong in all size categories (see Figure 2).

However, considerable differences can be observed in the recovery from the franc shock. As soon as mid-2016, large industrial enterprises were again assessing their business situation almost as positively as before the abandonment of the minimum exchange rate. Small enterprises experienced difficulties for considerably longer. The reasons for this diverging development are obvious: Larger enterprises more often have production locations abroad and were therefore able to cushion the currency shock via outsourcing more easily than smaller ones. On top of this, many small industrial enterprises are suppliers of larger companies. One of the measures adopted by the latter against the strength of the franc was also to outsource their supplier relationships.

However, the situation has also brightened significantly for small industrial enterprises since March 2017. The general upturn in the global economy increasingly appears to be reaching Swiss industrial SMEs as well.

Recovery from the CHF shock lasted longer at SMEs

Fig. 2: Recovery from the CHF shock lasted longer at SMEs

KOF business situation indicator (industry): Balance in percentage points.
Source: KOF Swiss Economic Institute (KOF), Credit Suisse

Chemical and Pharmaceutical Industry

Although year-on-year exports of the chemical and pharmaceutical industry rose sharply in the first four months of 2017 (pharmaceuticals: +7.9%; chemicals: +1.7%), a large share of this growth could be attributable to a base effect.

The trend for exports moved sideways. However, the business situation continues to be assessed more positively by pharmaceutical and chemical companies than by other industrial sectors. It is therefore to be expected that the sector will be able to increase its sales once again in the current year.

Export momentum stabilized again at the start of 2017

Fig. 3: Export momentum stabilized again at the start of 2017 

Exports: trend, index January 2014 = 100; YoY change in %.
Source: Swiss Federal Customs Administration, Credit Suisse 

Engineering, Electrical, and Metal Industry (MEM)

Engineering is the segment of the MEM industry that has so far recovered best from the strong franc. This is although sales are still well below the level of 2014, when the minimum exchange rate still existed. They have been growing again since the second half of 2016, not least thanks to demand from abroad.

In the first quarter of 2017, sales in engineering recorded a year-on-year increase of 5.5%, while in the metal industry and electrical engineering they continued to decline (3.9% and -3.1% respectively). In view of the positive economic outlook for the key sales markets, it can be expected that sales growth in engineering will continue as the year progresses.

Sales recovering primarily in engineering

Sales recovering primarily in engineering

Sales, four-quarter average, index: Q1 2014 = 100.
Source: Swiss Federal Statistical Office, Credit Suisse

Watch Industry

Following the slump in 2016 (-9.9% year on year), working day-adjusted watch exports in the first four months of 2017 were 2.5% below the prior-year level. The development of capacity utilization and unemployment also points toward a stabilization, although watchmaking companies are still largely assessing the current business situation negatively.

The turnaround on the Chinese market particularly helped to ease the situation and exports to the United Kingdom have also risen sharply so far this year. However, the situation remains tense in most other markets and therefore, substantial growth in watch exports for 2017 as a whole is not to be expected.

Watch exports to China increasing again

Watch exports to China increasing again

Nominal exports, working day-adjusted, YoY change in %; share in %.
Source: Swiss Federal Customs Administration, Credit Suisse 

Retail Trade

Thanks to the very mild weather in February and March 2017, the sluggish recovery so far after the abandonment of the EUR minimum exchange rate picked up briefly in the first quarter. The do-it-yourself and clothing/shoes segments benefited most from the favorable weather, although the latter segment continued to sustain a nominal fall in sales (-2.1% in Q1 compared with the previous year).

Meanwhile, the food segment stagnated, although it is expected to grow moderately again in the course of the year. Despite the robust economy, the situation in the non food segment remains tense owing to the structural shift to (partially) foreign online trade. 

Sluggish recovery in the retail trade after the end of EUR minimum exchange rate

Sluggish recovery in the retail trade after the end of EUR minimum exchange rate 

Retail price index, 12-month average; normal sales, YoY change in %.
Source: GfK, Swiss Federal Statistical Office, Credit Suisse 

Tourism

A winter season largely lacking in snow has delayed the recovery of SMEs in the Swiss hotel and catering industry that set in in mid-2016. Following a positive fall (+1.9%, Sept.–Oct. 2016, YoY), the number of overnight stays between November 2016 and February 2017 remained at their prior-year level.

Despite the recovery trend, the majority of hoteliers continues to assess the business situation negatively, with the assessment of small establishments, where sentiment has been deteriorating constantly for three years, particularly catching the eye. Based on the economy and the improved exchange rate, a slight increase in the number of overnight stays for 2017 can be expected.

Small hotels becoming increasingly pessimistic

Small hotels becoming increasingly pessimistic 

Hotel sector: assessment of current business situation by size of business, "good"/"poor" balance in percentage points*.
Source: KOF Swiss Economic Institute, Credit Suisse, *four-quarter average 

Energy Supply

Although Swiss demand for electricity remained practically stable, domestic production fell by over 6% in 2016. This gave rise to the first electricity import surplus since 2011. The decline in production resulted among other things from extraordinary nuclear power plant shutdowns (Beznau I, Leibstadt) as well as below-average water levels at times.

Energy wholesale prices that reached record low levels in 2016 also exerted a negative impact. However, wholesale prices have been rising again since the fall of 2016, not least due to stoppages at Swiss and French nuclear power plants.

Turnaround in energy wholesale prices

Turnaround in energy wholesale prices

Spot market prices of base load electricity in EUR/MWh, 12-month average.
Source: European Energy Exchange, Gestore Mercati Energetici, Credit Suisse