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The status of a safe harbor may hinder the economy of Switzerland

19.08.2018
Financy, Switzerland

Trade conflicts create the risk of a strong strengthening of the franc.

 The sharp increase in the Swiss franc's rate against the euro in 2015 hit Swiss exporters. Since then, the economy of Switzerland has recovered due to the acceleration of the world economy and the influx of tourists. The unemployment rate in the country is now the lowest in the last 10 years and is equal to 2.6%, and the Swiss National Bank cautiously forecasts that GDP this year will grow by 2%, which will be the maximum since 2014.

"The weather is favorable, the Swiss franc is now not so expensive, and the economic situation in Europe has improved, so people can afford Switzerland again," says Maurice Rapen of the Swiss Cable Car Association.

But economic risks have not disappeared. Although businessmen benefit from good times, they are concerned that international trade and geopolitical conflicts will again attract investor attention to Switzerland as a safe harbor. When investors buy up Swiss francs, the exchange rate of this currency is growing, which is why Swiss exporters and the tourism sector are becoming less competitive. The effect of "harbor" can affect "at any time," warns the chief economist of EFG Bank Stefan Gerlach.

 
Frankenschock in January 2015, when the Swiss franc rate jumped nearly 30% against the dollar and the euro, was due to the cancellation by the National Bank of Switzerland of the ceiling of the national currency rate against the euro. To prevent the strengthening of the national currency, the central bank lowered the key interest rate to -0.75%. Despite the subsequent economic recovery, the central bank has not changed interest rates since.

The inaction of the central bank betrays his fears that the sudden aggravation of the situation in the world will again provoke an increased demand for francs. It also highlights the difficulties caused by close ties with the euro area. Analysts are sure that the Swiss National Bank will not raise interest rates earlier than the ECB. "If you flew from Mars, you might think that the economy looks very strong and everything is simple, until you see the interest rates of the central bank," Gerlach said.

As a result, in the event of a crisis, the National Bank of Switzerland will have to consider even more radical steps. Due to currency interventions, its balance sheet has already swelled to more than 830 billion Swiss francs ($ 835 billion).

In April, the Swiss currency rate fell to about 1.20 Swiss franc / euro, the minimum since January 2015, but after that it consolidated to about 1.15 Swiss franc / euro.

The KOF Economic Institute at the Swiss Higher Technology School of Zurich (ETH Zurich) recently reported that its measured economic confidence in the country declined in July. Since May, it is at its lowest level in the past two years. This "confirms the nervousness about the future - trade conflicts and capital inflows into the safe harbor," says Nadi Gharbi, an economist at Pictet.

Trade conflicts may not pose a direct threat to Switzerland. They do not yet affect such industries as pharmaceuticals, the production of watches and chemical products or financial services in which Switzerland is strong. But they can touch it indirectly in the form of a slowdown in the economy of other European countries, in particular Germany. Even more dangerous if trade conflicts scare investors and provoke a strengthening of the franc.

"These indirect effects are much more important for Switzerland," notes UBS economist Alessandro Bee.