Switzerland's Economy Is Still Fighting Currency Indigestion

(Bloomberg) -- Two years after Switzerland suffered a surge in the franc, the currency is still proving a challenge.

While the move in 2015 didn't cause a recession, the Swiss economy remains burdened with the aftermath: an exchange rate that the central bank continues to describe as “significantly overvalued.” That picture was reinforced by data on Thursday showing exports recorded their weakest quarterly result in nearly two years at the end of 2016 and investment declined.

“We've swallowed the strong franc but possibly not digested it entirely yet,” Hans Hess, president of machine, electrical and metals industry association Swissmem, said earlier this week. “There are various sectors where there are clear traces, of course the export industry.”

The economy eked out growth of just 0.1 percent in the fourth quarter, after an equally meager pace in the third and short of the 0.4 percent increase forecast by economists in a Bloomberg survey.

One reason for that weak performance is likely to have been the franc, which appreciated 1.8 percent versus the euro in the final three months of 2016. Investors on edge about an array of risks such as the Trump administration's policies, Brexit and elections in France have pushed it further up this year. The haven currency has risen roughly 0.7 percent in 2017 despite the central bank's negative deposit rate and intervention pledge, potentially putting a damper on the expansion going forward.

The franc was little changed at 1.06425 against the euro at 12:22 p.m. in Zurich.

Euro-Area Boost

Yet better momentum in the neighboring euro area may help Switzerland, where the manufacturing, retail and tourism sectors have all been negatively affected since the Swiss National Bank stunningly dropped its cap of 1.20 per euro on the franc in early 2015, which caused the pace of growth that year to halve.

The 19-nation bloc may be in better shape than it's been for years with economic confidence and long-anemic inflation improving and unemployment -- though still high -- beginning to decline. That's good news for Switzerland, since the euro area is its top destination for exports.

Swiss building materials company Sika AG sells membranes for waterproofing and adhesives to countries in Europe. According to Chief Executive Officer Jan Jenisch “this is going very well.”

Consumption of private households grew 0.9 percent in the fourth quarter, thanks to spending on health care as well as housing and energy, while government demand rose moderately, the SECO said in a statement. Yet investment in equipment fell 0.7 percent and exports of goods declined 2.5 percent.

“In the fourth quarter, the Swiss economy clearly disappointed, but if you look ahead, it looks better for exports, both given the manufacturing data for Switzerland but also the international environment,” said Alessandro Bee, an economist at UBS Group AG. “What may have hurt exports is that the franc appreciated last fall.”

Barometers of Switzerland's economic prospects are upbeat, with a manufacturing indicator strengthening and the KOF indicator signaling above average growth rates. Still, political and economic risks have led companies to put off local investments. A survey conducted late last year found a larger proportion of firms were weighing cutting jobs in Switzerland and fewer expect to step up investments.

Challenges Ahead

U.S. economic policies could also throw a spanner in the works for the sectors experiencing good growth. Healthcare, which has been a driver of momentum, may be in for a tougher ride: Joe Jimenez, chief executive officer of Basel-based drugmaker Novartis, was among executives whom President Donald Trump met with in late January, and Trump said afterward he wanted them to manufacture in the U.S.

Moreover, Switzerland faces the challenge of being perceived as increasingly less hospitable to global enterprises, particularly after a referendum last month shot down a bid to reform corporate taxation.

German industrial output unexpectedly fell the most in eight years in December due to the timing of the Christmas holidays, prompting Raiffeisen Schweiz economist Alexander Koch to see a similar explanation in Switzerland and saying the country's fourth-quarter growth might not be indicative of a trend.

His view would be in line with that of the SECO, which expects momentum to pick up to 1.8 percent this year, with a zero rate of inflation. It will provide a new set of forecasts on March 21, just five days after the SNB publishes its own predictions at its quarterly policy assessment.

“It's not a sign that the economy is really in dire straights,” Koch said. “There's a sense of more optimism, so we think the first quarter is going to be a solid start into the new year,” though there probably wouldn't be a further pickup in industry.

--With assistance from Joshua Robinson and Alice Baghdjian

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss, Jana Randow