Switzerland’s Economy Shrinks, Squeezed by Strong Swiss Franc

29 May 2015 | Author: | No comments yet »

Is The Swiss Franc A Good Investment?.

ZURICH—Switzerland’s economy contracted for the first time in 4½ years in the first quarter as the strength of the Swiss franc hit foreign demand for the country’s pharmaceuticals and machinery products. Gross domestic product in the three months through March fell 0.2% from the previous quarter and was 1.1% higher from the same period last year, the Federal Department of Economic Affairs, Education and Research said. The franc cap had helped keep Swiss export prices competitive, but the currency’s gain of around 12% since the central bank scrapped the cap has pegget back sales to the eurozone which buys almost half of Switzerland’s exports.

The data also hands ammunition the central bank’s critics, who say its January decision to give up the cap versus the euro is jeopardizing the economy. The ceiling exit caused the franc to surge by a record against the euro in the quarter, a particular hardship for industrial companies that export a large portion of their wares. “We’ve got the first sign of a recession, the second quarter surely won’t be better,” said Karsten Junius, chief economist at Bank J Safra Sarasin Ltd. in Zurich, adding that the SNB won’t necessarily have to revise its growth outlook for this year. “I think the SNB will be able to shrug this off.” SNB President Thomas Jordan predicts the economy will grow “just under” 1 percent in 2015, half what was forecast when the cap of 1.20 per euro on the franc was still in place. In fact, SNB Vice President Jean-Pierre Danthine said as recently as last week that there would only be “probably one bad negative quarter.” While Swiss reactions to the SNB’s abandonment of its cap have generally been benign, the prospect of slowing growth and rising joblessness has prompted criticism from members of the Social Democratic party, the second-biggest in parliament, who have called for the establishment of a new minimum exchange rate. However, due to recent sanctions imposed by the United States and the European Union against Russia, Russia has been looking for alternatives to U.S. dollars and securities (see related How US & European Union Sanctions Impact Russia).

The May reading of the KOF economic barometer indicated that ‘‘the Swiss economy can be expected to exhibit growth rates clearly below average,” according to a statement Friday. The geopolitical and economic ecosystem: Switzerland has a strong economic system that is comfortable with a limited-yet-realistic growth rate and has controlled requirements. According to the International Monetary Fund, Swiss growth is set to slow this year to 0.75 percent, due to the unfavorable exchange rate, with unemployment set to increase moderately. Being the commodity which is used as a reserve all across the globe by various nations, gold is perceived to be a good hedge for inflation (see related Inflation Hedge). Imagine a large economy like Russia or Germany willing to park its huge reserves in Swiss debt, effectively leading to taking significant control of Swiss debt.

It is apparent that the Swiss economy is unlikely to move from its low-debt, low-growth ideology, and will continue to remain a major banking destination.

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