Euro-franc exchange rate: Swiss economy adapts

Swiss economy adapts to the strong Swiss franc

The Swiss economy is handling the euro-franc exchange rate increasingly well. But for some sectors, the Swiss franc is still significantly overvalued. Find out which sectors are experiencing difficultly and which have the advantage of pricing power.

The euro-franc exchange rate is slowly approaching fair value

The Swiss franc is tending to appreciate against the euro. Because, for some years, prices in the euro zone have been rising faster than in Switzerland. Credit Suisse economists estimate that the Swiss franc is currently still overvalued against the euro by around 9%. A fair euro-franc exchange rate as measured by an extended purchasing power parity (PPP) model would be 1.24, according to their calculation model.

This fair value euro-franc exchange rate has seen a downward trend since 2002, by around 20%, a development that is likely to continue. Because it is expected that inflation will be lower in Switzerland than in the euro zone in the future too. In about five years, according to Credit Suisse's forecasts, the fair value is likely to be where the euro-franc exchange rate is today. 

Euro-franc exchange rate and fair value since 2002

Euro-franc exchange rate since 2002 compared to fair value

Source: Swiss National Bank, Credit Suisse

The Swiss franc is overvalued for the Swiss economy

However, for most of the Swiss economy, the picture is not so rosy. For many industrial sectors, the Swiss franc is significantly more overvalued than on average for the economy as a whole.

 

According to the approach used by Credit Suisse, the current euro-franc exchange rate for the textile, printing, and plastics industry is still overvalued by 30% to 40%, and for the electronics, paper, machinery, metal products, and food industries by between 10% and 20%. Only for the pharmaceutical, chemicals, and metals industries is the Swiss franc just slightly overvalued, or not at all.

The Swiss franc is overvalued for the Swiss economy

The EUR/CHF exchange rate of 1.13 is overvalued for most industrial sectors

Deviation from industry-specific fair value (EUR/CHF)

Source: Credit Suisse 

Pharmaceutical industry is least dependent on the euro-franc exchange rate

However, a Swiss franc that is overvalued against the euro is not necessarily a problem for every individual sector. Some sectors have high pricing power. Either demand for their products is so strong that they are not obliged to reduce prices even if the Swiss franc increases in value, or price is not the key purchasing criterion. The proportion of exports to the euro zone also varies from sector to sector.

The pharmaceutical industry is in the best position. First, the Swiss franc is not overvalued in this industry. Second, the pharmaceutical industry exports a lot to the US and has a high degree of pricing power. The situation looks equally positive for the watch industry. Although the Swiss franc is overvalued for the mechanical engineering industry, the situation is mitigated by high pricing power and a high degree of global diversification. The same applies to a slightly lesser extent to the electrical engineering sector.

Some sectors of the Swiss economy have to take action

The chemicals and metals industries have almost been able to regain their competitiveness through significant price adjustments since the franc appreciated; this is despite their somewhat lower pricing power compared with the pharmaceutical industry, for instance, and the greater focus on Europe in the case of the metals industry.

 

Other sectors, by contrast, such as the food, textiles, and vehicle industries, as well as the paper and plastics industries, are still in a difficult position: Their pricing power is low, the overvaluation of the Swiss franc is high, and the euro zone is of key importance. In these sectors, further outsourcing of activities abroad is to be expected, unless they manage to develop niche products that are less sensitive in terms of price. This would enable them to improve their market position and to compensate for the impact of price competition.