In Switzerland, the Trade War Is Mixing Up a Painful Cocktail
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here.
Donald Trump’s upending of the global trade order is just one part of a triple whammy hitting Switzerland and its exporters.
Weaker global demand, a surging franc and a slump in Germany have come together to put a black cloud over the Swiss economy. Manufacturing is losing steam and economic growth this year may slow to about half the pace of 2018.
The latest victim was Schaffner, a maker of electrical components that on Monday cited the currency as it warned that sales would decline in the second half of the year. The fallout is also being felt in companies such as air conditioning-maker Belimo Holding AG, OC Oerlikon Corp AG, and steel-maker Schmolz + Bickenbach AG, which all cited the U.S.-China dispute.
“The big concern is everything having to do with global trade -- Trump and China,” said Jan-Egbert Sturm, director of the KOF Swiss Economic Institute in Zurich. Also, “we’ll get to feel the problems that are hurting the German car industry.”
Switzerland’s manufacturers are no strangers to strain, and got hammered by a sharp rally in the franc in 2015 when the central bank shifted policy. But this time is different, and there’s little tailwind from the global economy to buttress demand.
The currency reached the strongest in two years this month, hitting export competitiveness and forcing the country’s central bank to intervene to hold back its advance. The appreciation partly reflects investor demand for safe assets amid trade wars and a gloomy global outlook.
Also in the mix is Germany, Switzerland’s biggest market. It’s in economic free-fall and big companies like Daimler AG, BASF SE, and Henkel AG have reduced their forecasts. That could mean lower sales of the high-precision machinery and parts made in Switzerland. China -- with whom the Swiss have a free-trade pact -- is also in the throes of a slowdown.
Growth in industrial production this year has almost solely been driven by pharmaceuticals, which is more immune to global downturns. Machine and metals production has fallen for two consecutive quarters, and a survey by the Swissmechanic association shows investment demand has dropped and profit margins are diminishing.
As car-parts maker Feintool put it in a letter to shareholders, “changing trade flows and discussions about the future of the internal combustion engine, hybrid technology, electric vehicles, and mobility in general are having an impact.” Due to the uncertainties, it isn’t issuing a detailed numerical outlook for this year.
So far, there’s been little impact on the jobs market, with unemployment is the lowest in nearly two decades. But there’s little sign that pressure on the franc will ease.
The next Swiss challenge is European Central Bank monetary stimulus, which will affect the currency. If, as expected, it cuts interest rates in September, investors bet the SNB will follow suit and reduce its policy rate, already at a record-low -0.75%.
“Consumption seems robust, but industry, foreign trade will get weaker,” said David Marmet, an economist at Zuercher Kantonalbank. The global slowdown “will have an effect, but with a delay. ”
©2019 Bloomberg L.P.