Switzerland: A buoyant economy with strong tailwind from a weaker franc
Janwillem Acket, Chief Economist, Julius Baer
Yesterday’s release of the Swiss manufacturing PMI for July at 60.9, the highest level recorded since February 2011, as well as last Friday’s strong reading of the broad-based KOF Barometer for the same month, both continue to signal increasing cyclical momentum for Switzerland during the current economic upturn driven by the Euro zone.
Since the landslide victory at the French parliamentary elections for President Macron’s party in June, which has significantly reduced political uncertainty in the Euro zone, a weakening Swiss franc to the euro has become a welcome additional tailwind for exporters to spur Switzerland’s ongoing upturn.
With no signs of any significant inflation for the time being, the Swiss National Bank (SNB) can thus stay on the sidelines and take a relaxed stance on currency stabilisation, as the franc remains still highly valued against the euro. It appears that in particular Swiss investors, who refrained from engagement in the Euro zone when political tension there was elevated, are now becoming more confident to return their surpluses to the Euro zone as investment. We have indications that shortening the franc has recently become an increasingly popular trade.
While we acknowledge a Swiss ‘miniboom’, piggybacking on the European upturn, we are witnessing euphoria with regard to the Euro zone and therefore caution against complacency, as does the SNB. The ‘safe-haven’ Swiss franc can resurge rapidly again as a hedge against European woes, should e.g. a cyclical drag from a surging euro materialise, while political worries about Italy and its politics pop up again.