150605 switzerland watch 4 months down the road

Switzerland Watch Four months down the road…

Group Economics Macro & Financial Markets Research Georgette Boele +31 20 629 7789

5 June 2015 • • • • •

Economy contracts because of sharp drops in net-exports and retail sales… …while deflation returns However, the SNB does not seem to be in a hurry to ease further… …while we judge that this is needed for an economic recovery Our year-end 2015 EUR/CHF is close to current levels at 1.05 …exports have plunged…

4 months down the road…

The strong rise in the Swiss franc has sent Swiss exports

On Thursday 15 January 2015, the Swiss National Bank announced a discontinuation of the minimum exchange rate of

sharply lower. The net contribution of exports to economic growth has been clearly negative (see graph in the left column

1.20 in EUR/CHF and lowered interest rates by 50bp to

below), although net exports have a tendency to overshoot.

-0.75%. This resulted in a dramatic rise of the Swiss franc.

The good news is that the Swiss franc has stabilised. The bad

Afterwards, the Swiss franc gave up some of its gains and EUR/CHF seems to have settled around 1.05. In this note we examine the impact of this action on the Swiss economy and

news is that this is still at relatively expensive rates. In order to make exports more attractive, prices need to be lower.

assess the outlook for the Swiss franc. …and so did retail sales…

Domestic retail sales have also fallen dramatically. The

Swiss franc still very strong

significant difference in prices between Switzerland and its

Index

surrounding countries has pushed consumers to shop abroad.

200

In the recent years, this was already a strong tendency but the

180

pressure has increased.

160 140

…plunge in retail sales…

120

Yoy %

100

8

80

6

60 80

85

90

95

00

05

10

15

4 2

Source: Bank of England

0 -2

Sharp fall in net exports…

Pps yoy

CHF inverse scale

15

-20 -15 -10 -5 0 5 10 15 20 25

10 5 0 -5 -10 -15 04 05 06 07 08 09 10 11 12 13 14 15 Net exports, contribution to GDP growth (lhs) Source: Thomson Reuters Datastream

trade weigted CHF

-4 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: Bloomberg

The drop in the manufacturing index shows that the manufacturing sector is also suffering. This is in sharp contrast to the developments in the eurozone. Since January of this year, the manufacturing index has been below the 50 boombust mark (see graph below).

2

Four months down the road… – 5 June 2015

…and weak manufacturing sector…

…and Switzerland is back in deflation

Manufacturing PMI, level

%

70

4

60

2

50

0 40

-2 00

30 95

00

05

10

15

05 CPI y-o-y

10

15

CPI core y-o-y

Source: Bloomberg

Source: Bloomberg

…pushing economic growth into negative territory…

SNB not in a hurry to ease further

With most important drivers of the economy showing

Despite contracting growth and deflation, the Swiss National

significant weakness, it will not come as a surprise that GDP

Bank (SNB) does not seem to be in a hurry to ease monetary

growth moved into negative territory in the first quarter. It

policy further to support the economy. On 30 May, SNB

contracted by 0.2% qoq down from 0.5% in Q4 2014.

President Jordan said further rate cuts by SNB will depend on

Compared to last year GDP still grew in Q1 by 1.1%. But also

international developments. He also said that “at minus 0.75%

here a sharp slowdown was seen. We expect another negative

we’ve gone already quite far and we’re waiting to assess the

print for the second quarter so that Switzerland would enter

effect”. “Europe and the US have probably reached the lower

into a technical recession. Later this year and next year we

bound of interest rates and will raise them again over time. The

expect some pick-up in economic activity. Switzerland will

franc is significantly overvalued, we’ve stressed that we’ll get

benefit from robust economic growth in its main trading

active on foreign exchange markets if necessary”. The SNB

partners. Moreover, lower prices and low interest rates should

will publish the updated growth and inflation forecasts at its

make up some of the loss in competitiveness.

next meeting on 18 June.

…push economy into negative territory…

Foreign currency Reserves CHF in bn

GDP, % qoq

%

3

600

2

500 400

1

300

0

200

-1

100

-2

0

90

95

00

05

10

15

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Source: Bloomberg

Source: Bloomberg

Switzerland back in deflation

More monetary easing would be helpful

The strong Swiss franc did not only have a considerable

We judge that the current financial conditions are too tight for

negative effect on economic growth, it also pushed Switzerland

the economy and that more monetary stimulus is needed. It is

back in deflation. Both core and headline inflation are back

rather surprising that the SNB has not already stepped up

below zero again (see the graph in the column on the right).

monetary policy easing in an environment where the ECB has

With domestic business and exports suffering, it is likely that

started with its aggressive QE programme. This ECB QE

deflationary pressures continue to build in the months ahead.

programme will continue to weigh on the euro in our view.

Therefore, it is likely that EUR/CHF has a tendency to move lower. To halt this tendency more monetary policy easing by

3

Four months down the road… – 5 June 2015

the SNB would be needed. Such easing could be delivered by lower official rates, currency intervention or quantitative easing or a combination of these. We expect EUR/CHF to continue to trade around 1.05 for the coming quarters. In USD/CHF we see more upside in line with our general stronger US dollar view.

3m interest rate expectations in Switzerland In %

0.00 -0.20 -0.40 -0.60 -0.80 -1.00 Jun 15

Jun 16

Jun 17

Jun 18

05-Jun Source: Bloomberg

Our Swiss franc currency forecasts level

USD/CHF EUR/CHF

05-Jun 0.9327 1.0496

Q2 2015 0.95 1.05

Q3 2015 1.05 1.05

Q4 2015 1.05 1.05

Source: ABN AMRO Group Economics

Q1 2016 1.00 1.05

Q2 2016 1.00 1.05

Q3 2016 0.95 1.05

Q4 2016 0.96 1.10

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Four months down the road… – 5 June 2015

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