September 2, 2015
Switzerland has always been a little aloof from its neighbours. It never joined the EU for example. However, it seems to benefit from its multiple, bilateral EU agreements whilst not suffering from the costs and potential downfalls of EU membership. Whilst it’s near neighbours France and Italy are battling recessionary and high unemployment problems and Germany and the UK are at loggerheads over the way the EU should be run, Switzerland is booming.
According to recently published Trading Economics figures, Switzerland had a 0.2% GDP growth for the second quarter of 2015, compared to the first quarter. This marks it as officially out of recession. As a knock on effect, its Franc has experienced a steep rise in value in the same period, severely lowering the competitiveness of its manufacturing sector – consumer demand and a booming tourism industry managed to reverse losses and put the country on an even keel.
Perhaps Switzerland is so successful because, just like its famous clocks, it is a well run and ordered society. Unlike its more southerly and warmer neighbours, people pay their taxes and, in exchange, are well looked after by their government. Unemployment is low, morale is high and not being a member of the EU means that it does not have to deal with ‘pesky’ Brussels regulations in matters of internal rule. Wages are rising in real time, there are few employment disputes and there is an overall fiscal stability with Interest rates skimming zero rates.
However not all is rosy in Switzerland. The Swiss National Bank recently revalued the franc, making, on paper, both exports and tourism less attractive. Thankfully, warm weather and political instability in other European countries caused a small increase in tourism revenues. Manufacturing initially struggled but quickly rallied with a quarterly increase of 0.5% after a decrease of 2.2% in the previous quarter.
As befits Switzerland’s reputation, the increase came mostly from watches, precision instruments and pharmaceuticals.
Although life looks good for Switzerland, challenges loom on the horizon. Currently it is attracting wealthy, highly trained immigrants. However, Switzerland is a mature country, not renowned for technological breakthroughs, nor does it have the taxation benefits of countries such as Monaco. It will therefore need to work hard to keep attracting these highly sought after individuals. Swiss industry is mature and both its technical and transport infrastructures are well established and competently managed. There is little expansion possible and Switzerland will need to work hard to counteract any “brain drains” as skilled labour moves to other countries where there is more work.
On the plus side, the Swiss per capita GDP is one of the world’s highest indicating that both the manufacturing and service industries are efficient and profitable.
The Swiss National Bank (SNB) is proactive in managing the Swiss Franc, keeping it pegged to the agreed Euro exchange rate cap of 1.20 francs per Euro. However in January 2015, this agreement was unilaterally cancelled, causing the Swiss Franc to immediately jump to a value of 20% more against the Euro. This was probably in response to the €1.1 trillion quantitative easing programme that was about to be launched by the ECB. The SNB, as a result of these activities, reported a loss of 20 billion Swiss Francs in the second quarter of 2015 bringing the 2015 losses to a total of 50.1 billion Swiss Francs or 7.5% of the Swiss GDP.
However the SNB did not lose money just by pulling the plug on the Euro currency peg. Its $550 billion foreign exchange reserves, $230 billion of which were in Euros, also suffered significant losses when the peg was unpegged. Some analysts say that these losses were as much as 94% of the SNB’s total losses for the second quarter of 2015. How the SNB will fare for the rest of 2015, having been freed of its need to spend billions of Francs to relieve the strong upward pressure on its currency is still to be seen. Hopefully the foreign exchange losses were a one-time event.
Politically, Switzerland is very stable – no surprises there. However, unpopular laws around corporate tax breaks, shareholder’s power to veto director’s remunerations and limits on immigration meant that in April 2015, Switzerland reported the lowest number of new foreign firm start-ups in the last decade. The total was an almost insignificant 274, down 8% from the year before and these companies created only 780 jobs.
Without tax breaks and with high currency costs, the cost of doing business in the country is becoming too expensive and unattractive for many foreign companies who are being attracted to more favourable areas such as Singapore, U.K. and Netherlands.
Switzerland, once the world’s more competitive economy (World Economic Forum) is now struggling to attract new blood to its shores. Perhaps a major rethink is required by the Swiss political masters – the once smooth running business, financial and political clocks need a rewind so that the current uptick can be repeated during the remainder of 2015.Meredith Smith