Swiss Economy Might Not Outpace `Big Canton' Germany for a While

(Bloomberg) -- If the Swiss economic growth is still left in the shade by Germany this week, its central bank knows exactly why.

Two-and-a-half years after suffering an exchange-rate shock that made its exports even more expensive, Switzerland has yet to rediscover its knack of outperforming neighboring Germany. While the two economies boast significant similarities, prompting the Swiss to dub their northern neighbor “the big canton,” forecasts suggest it will only be in 2018 that the smaller country can pull ahead once more.

Swiss Economy Might Not Outpace `Big Canton' Germany for a While

Switzerland’s weaker momentum will probably be evident again on Thursday, when first-quarter gross domestic product figures are due. Economists forecast growth of 0.5 percent for the three months through the end of March, falling short of Germany’s 0.6 percent.

The strong franc is a problem “we’ve got to get to grips with,” said Juerg Werner, chief executive officer of Metall Zug AG, which makes products ranging from washing machines to wire-cutting devices and hospital sterilization equipment. “It remains quite difficult, but that is the challenge for Switzerland.”

Momentum took a hit when the franc surged against the euro in early 2015 after the Swiss National Bank scrapped its cap with the single currency. Profits suffered and companies responded by slashing input costs and jobs, while boosting automation and even moving production abroad.

While aggregate output has since recovered, some companies -- particularly in the manufacturing, electrical and metals industries -- are still smarting. A study prepared for the SNB’s March policy assessment found that almost 40 percent of firms rated their utilization of production capacity as below normal. Roughly the same proportion of company representatives said margins were lower than usual.

Common Qualities

Although Switzerland is not a member of the euro area and its population is a 10th of Germany’s, the two closely integrated economies have a lot in common: joblessness far below the regional average, manufacturers that specialize in producing high-quality, technically sophisticated goods and a buoyant residential property market.

The big difference between them is the exchange rate. While the franc has been on an appreciation course for years, a weaker euro has helped Germany’s exporters.

Data from the Organisation for Economic Cooperation and Development shows that the gap between what the Swiss economy could produce and is actually producing widened in 2015, while Germany is performing above potential.

Swiss Economy Might Not Outpace `Big Canton' Germany for a While

“The franc remains significantly overvalued, inflation is still very low, growth is still relatively low and production factors aren’t fully utilized,” SNB President Thomas Jordan said at a private banking event in Zurich earlier this month. “That means we need to continue with our expansive monetary policy.”

In addition to introducing the world’s lowest deposit rate of minus 0.75 percent, the SNB has pledged to use interventions on the foreign exchange market to counter pressure on the franc. Its next quarterly policy review is scheduled for June 15.

A healthier euro area is likely to benefit Switzerland, since the 19-country region is its biggest destination for exports. While European Central Bank officials are at odds over eventually winding down stimulus, President Mario Draghi has said the bloc’s recovery is increasingly becoming solid and broad-based.

Swiss Upswing

Economic data such as the purchasing managers’ index and the Credit Suisse CFA Society Switzerland Indicator are also signaling a Swiss upswing, in line with their German counterparts. Industrial companies recorded a 2.3 percent year-on-year boost in new orders in the first quarter, while exports “performed well,” rising 3.9 percent, according to industry group Swissmem.

The International Monetary Fund expects the Swiss economy to increase 1.4 percent this year, just shy of Germany’s 1.6 percent. For 2018 it forecasts rates of 1.6 percent and 1.5 percent, respectively.

“The indicators are good and we’re benefiting from the recovery in neighboring countries,” said Alexander Koch, an economist at Raiffeisen Schweiz in Zurich. “After the two disappointing quarters in 2016 we expect to see a pickup in early 2017. But I don’t think that growth this year will be much more than last year’s 1.3 percent, which is still below potential.”