Economic outlook under a new light

Due to the abolition of the Swiss currency ceiling, BAK Basel Economics expects the Swiss economy to grow significantly less than predicted in the years 2015 and 2016 since the Swiss National Bank made its decision.

 

The decision, announced by the Swiss National Bank (SNB) on 15th January 2015, to abandon the cap which it had introduced three and a half years ago to maintain the minimum exchange rate for the Swiss franc against the Euro, sent the Swiss franc soaring against the single currency.

After the Euro exchange rate briefly fell below 0.85 francs, it then recovered again slightly and is now at 1.06 francs. Whether the exchange rate will stabilise close to this value as its annual average or if there will be more outliers as the currency goes up or down, is not yet clear. However, a speedy return to the previous level of 1.20 Swiss francs/Euro can be realistically ruled out.

Huge uncertainty

The current climate poses a major uncertainty factor for the forecasts for economic development. On the one hand, it is not clear how the Swiss franc will develop in the coming months. On the other hand, it is difficult to predict just how this will affect the competitiveness of the companies and how they will deal with the situation. Despite these uncertainties, the forecasts do provide valuable insights into the impact of the new framework conditions for Switzerland’s economic development.

Switzerland is experiencing an economic slowdown

While, according to the calculations of the Basel economists from BAK Basel Economics, the economic output would have increased to 1.9 percent in the current year at an exchange rate of 1.20 Swiss francs/Euro and we could have expected growth of 2.3 percent in 2016, according to the latest forecasts for the year 2015 we now should expect a noticeably weaker growth in Switzerland's real gross domestic product of just 1.0 percent. In the following year, growth also still falls short of original expectations at 1.8 percent – however it is a return to positive growth 1). So although there is a noticeable slowdown in Switzerland’s economy, a recession is not expected. The decisive factor here is not only the current stabilisation of the Swiss franc, but in particular the emerging global economic recovery. However, the expected real negative economic impact will be due primarily to a decline in exports and falling export prices, while, for the time being, private consumption is one of the main drivers for growth.

Prospects for the Basel region

The Basel region paints a somewhat different picture. Compared with the rest of Switzerland, the life sciences industry represents a high export quota for the region. Because international trade in this sector is done more in U.S. dollars than in other sectors, it can reasonably be assumed that the life sciences industry will be relatively immune to the scrapping of the lower limit on the Euro-franc exchange rate. Export losses are likely to be lower and therefore play less of a part in slowing the region’s growth.

The retail trade looks set to experience the opposite effect. Basel’s proximity to other countries, in particular Germany, has meant that cross-border shopping traditionally plays a greater role here than in other regions in Switzerland. It will probably still increase to a certain degree due to the strong franc. However, a fall in the revenue of the Basel retail sector has a dampening effect on the economic growth of the region and raises fears of increased unemployment.

Although the structure of the region’s industry has proven advantageous, in the current climate its proximity to the border seems to be having a more adverse effect on its economic development. But it is likely that the positive effect of the relatively robust life sciences industry will more than offset the negative effect of increased cross-border shopping. Despite the lack of up-to-date and reliable forecasts on regional growth, it is therefore assumed that the Basel region will continue to be among the country’s regions with the highest growth.

1) This forecast issued by BAK Basel Economics on 10 March 2015 revises estimates upwards compared to the projections at the end of January. The calculations are based on an exchange rate of: 2015 1.09 CHF / EUR and 2016 1.13 CHF / EUR.

Contact:

Economics and Projects Unit
Dr. Anna-Marleen Plume
Head of Economics and Projects Unit
Utengasse 36
4005 Basel

Phone: +41 61 267 65 12
E-Mail: anna-marleen.plume@bs.ch

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