Switzerland: Broadening Recovery
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Switzerland: Broadening Recovery

The Swiss economy is expected to grow by 1.5 percent in 2017. While more and more export sectors are regaining their competitiveness, the domestic economy lacks growth momentum. With the inflation rate likely to turn positive, the Swiss National Bank (SNB) is expected to reduce its currency purchases in the course of the year.

Dynamic Export Growth

Export growth has picked up with companies reporting dynamic demand from the USA, as well as Germany, Scandinavia and the UK. On the other hand, demand from emerging markets is still subdued. The Purchasing Managers' Index (PMI), a gauge of economic activity in the manufacturing sector in Switzerland, started the year on a high note, at 54.6 points in January, also indicating solid order intake.

Swiss Households Lack Optimism

The dynamics of the domestic economy are weaker, as households lack optimism. However, not least due to immigration, private consumption should remain resilient. We also do not expect an acceleration in investment spending in equipment. Increased demand and favorable refinancing costs are offset by a high level of political uncertainty with regard to the corporate tax reform and immigration policy. We therefore forecast slightly lower growth in investment in equipment for 2017. Overall, we expect real GDP to expand by 1.5 percent in 2017, as in 2016.

SNB to Reduce Interventions

While we still consider the Swiss franc to be overvalued against the euro, the deflation risk has diminished and we expect the inflation rate to turn positive in 2017. We expect an average rate of 0.5 percent, after –0.4 percent in 2016.

Adding to this backdrop the inclusion of Switzerland on the US Treasury's monitoring list of potential "currency manipulators" and the likely willingness of the SNB to "escape" from a situation in which its balance sheet continues to expand steadily due to currency market interventions, we believe that the SNB will become less active in the foreign exchange market in the course of 2017 and may tolerate a stronger franc.

At this stage, we do not expect the SNB to explicitly and abruptly halt foreign currency purchases. Also, a rapid appreciation following a sudden rise in risk aversion in the financial markets is, in our view, likely to be met with more foreign exchange interventions.

Solid order intake

Solid order intake

Last data point: January 2017.

Source: Thomson Reuters DataStream, Credit Suisse / IDC

Reflecting solid external demand, order intake has reached levels not seen since the appreciation of the Swiss franc in January 2015. The Swiss export industry should benefit from the improved dynamics in Europe and the USA in the months to come. We expect real export growth (of both goods and services) to reach 4.5 percent in 2017, a similar growth rate to that in 2016.

Purchases of foreign currencies by the SNB

Purchases of foreign currencies by the SNB

Last data point: January 2017.

Source: Thomson Reuters DataStream, Credit Suisse / IDC

With the Brexit vote in June and the US elections in November, the SNB was particularly active in the foreign exchange market in 2016. We expect it to diminish its purchases of foreign currencies in 2017, barring any major shock in financial markets. However, we expect the SNB to maintain its deposit rate at –0.75 percent.