First, the Swiss economy is export-driven, which means the 20-percent appreciation in the Swiss franc vs. the greenback over the past 12 months negatively impacted the country’s manufacturing and export sector. “Currency appreciation makes your goods look more expensive,” says David Vermeire, economist at Moody’s Analytics. Recent economic data has, in fact, revealed an overall slowing trend. “Growth in the second quarter slowed,” says Jay Bryson, global economist at Wells Fargo, noting that Switzerland’s Q1 GDP came in at 2.6 percent, compared to 2.9 percent in Q4 2010.
Purchasing manager’s data revealed manufacturing has contracted. According to Bryson, the PMI (Purchasing Manager’s Index, a gauge of manufacturing growth) stood at 59 as recently as March 2011. In June it was at 53.4, and at 53.5 in July. “Based on the PMI, I would expect to see some slowing in second quarter GDP as well,” Bryson adds. “The market is expecting a 2.3-percent reading for the second quarter.”
Nomura forecasts 2011 Swiss GDP at 2 percent, 2012 at 1.9 percent, and 2013 at 1.6 percent. Moody’s Analytics predicts a 2-percent GDP pace for 2011 and 2.2-percent for 2012. However, growth forecasts would be revised down if the currency resumes its appreciation trend. “(Forecasts) are a the mercy of international markets right now,” notes Iesha Montgomery, associate economist at Northern Trust. Switzerland’s export-driven economy is especially vulnerable because the country tends to produce so-called high-value-added products such as pharmaceuticals, machinery and electronics, watches, and precision instruments.
Switzerland’s largest trading partner is Germany, followed by the U.S., Italy, France, and the UK, according to Vermeire. Given their heavy trading with Eurozone countries, the Swiss tend to place a greater importance on the Euro/Swiss exchange rate (EUR/CHF) than the dollar/Swiss rate (USD/CHF).