The Swiss Economy Proves to be Robust - Economic Prospects Following the Franc Shock

The economic cool-down forecast in the wake of the lifting of the minimum exchange rate of 1.20 francs to the Euro has been confirmed. As a result of revaluation of the franc, Switzerland’s economic growth in the 1st six months of 2015 practically came to a standstill. Restrained growth is to be assumed for the whole present year, while the first acceleration in growth is already expected for 2016. Switzerland is once again showing itself to be very adaptable.

The first six months following revaluation of the franc

While Switzerland’s real gross domestic product (GDP) decreased in the 1st quarter by 2.0% compared with the previous quarter, the Swiss economy recorded slight growth in the 2nd quarter. In view of the strong revaluation of the Swiss franc and the associated challenges as well as uncertainties, the Swiss national economy has shown itself with this result to be thoroughly resilient. According to explanations about the autumn forecast 2015 from the KOF Swiss Economic Institute at ETH Zurich, low exchange rate elasticity and the absence of a recession were caused by stronger price fluctuations than expected. This reaction admittedly supports growth, but might have led to lower margins in many companies considering the time horizon for reductions in costs.

Slightly altered prevailing conditions in the global economy

If we want to make statements about future economic development, it is essential for a small, open and strongly interlinked national economy like Switzerland to first take a look at the global economy and global developments. On the one hand there is a waning economic dynamic in countries at the stage of economic take-off - especially in China and Brazil - and, on the other hand, slight acceleration in growth in the USA, as well as a slow and steady recovery in the Eurozone. Prospects for Germany, Switzerland’s most important trading partner, continue to look positive after moderate growth in the first six months of 2015.

Restrained growth in 2015 and slight acceleration from 2016

For the Swiss economy, global developments mean that risks relating to the economic cool-down in countries at the stage of economic development have increased slightly. For many export-orientated Swiss companies, an ever-increasing part of demand is coming from countries at the stage of economic development. At the same time, there have been more signs of stabilising demand from important sales markets.

Taking into consideration global developments, as well as on the basis of developments in recent months (in particular, changes in the exchange rate), the Confederation’s expert group on economic prospects made the assessment in its most recent forecast that the Swiss economy will grow by 0.9% in 2015. The current devaluation of the Swiss franc to a current value of about 1.08 Swiss francs to the Euro is above all having a supportive effect. It is nonetheless to be assumed that domestic demand (especially private consumption) will continue to support growth, while foreign trade is expected to make a negative contribution to growth for the whole of this year and probably beyond.

With regard to production, no noteworthy growth should be expected from sectors that are sensitive to fluctuations in the exchange rate, such as trade and hospitality. Considering its high export dependency, industry might traditionally be affected by decreases in growth, but, following a decrease in the 1st quarter, it was already showing growth in the 2nd quarter of this year, transpiring to be extremely robust in the face of the lifting of the minimum exchange rate.

However, noticeable acceleration in growth is only expected in 2016, when the Confederation’s expert group on economic prospects anticipates growth in GDP of 1.5% across the whole of Switzerland.

Prospects for the Basel Region

Once again, things are looking more positive for the Basel region than for Switzerland as a whole. Basel-Stadt is indeed also affected by slowing of the exchange rate following lifting of the Euro minimum exchange rate, but the economic cool-down is on another level in comparison with other regions. Following overall economic growth of expected 3.0% in 2014 (outlook), the Basel economy will grow at a rate of 1.6% according to the estimation of BAK Basel Economics. The economic recovery in 2016 means that growth in GDP of 2.0% can be expected for the Canton.

The dominant chemical and pharmaceutical industry, for which BAK Basel Economics forecasts an above-average growth in 2015 furthermore, might be the main driver of growth in both years. Demand for pharmaceutical products is considered to be relatively price-inelastic on the whole, i.e. the increase in demand might be dynamic, while pharmaceutical companies might also be confronted with a reduction in margins. One reason is administered prices for medication that mean that revaluation cannot be fully passed on to customers. Furthermore, a large part of the sector’s trade is done in US Dollars, compared to which the revaluation of the Swiss franc is less strongly pronounced.

Tourism in Basel sharply contrasts to developments in Switzerland as a whole. While tourism development in large parts of Switzerland is declining, the number of overnight stays in Basel-Stadt has increased since the beginning of the year compared with the corresponding period in the previous year by 50,362 or 5.9% to 910,793.

Source: for the international and Swiss forecast “ECO Konjunkturtendenzen Herbst 2015” and “KOF Analysen, Konjunkturanalyse: Prognose 2016/2017” and for cantonal forecast BAK Basel Economics (version: October 2015) as well as for tourism: Office of Statistics of the Canton of Basel-Stadt, Statistical Announcement of 18th September 2015.



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Dr. Anna-Marleen Plume
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