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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