Economic forecasts 2015 and 2016 from the Federal Government’s Expert Group: Consequences of the higher exchange rate for the economy

State Secretariat for Economic Affairs

Bern, 05.02.2015 - The Federal Government’s Expert Group has decided not to currently issue a full intermediate update of the forecasts prior to the next regular press release on 19 March 2015. However, the Expert Group does acknowledge that the removal of the 1.20 floor on the CHF-euro exchange rate on 15 January by the Swiss National Bank and the subsequent sharp appreciation in value of the Swiss franc against the Euro and other currencies means that one of the central assumptions on which the forecasts were based – a currency exchange rate situation remaining essentially unchanged – is no longer valid. The most recent official forecasts which were published on 18 December 2014 assumed growth in GDP of 2.1% for 2015 and 2.4% for 2016, as well as a slight fall in unemployment, have therefore been overtaken by events. If the Swiss franc remains at a significantly higher level over an extended period, economic development must be expected to be weaker than had been assumed in the previous forecasts.

As a result of a sharp appreciation of the Swiss currency, manufacturing companies in Switzerland are suffering from a significant loss of price competitiveness. The level of uncertainty for these companies has also increased. The 1.20 floor on the CHF/EUR exchange rate was a key stabilising factor for Swiss firms and has now suddenly disappeared. Initial reports indicate that numerous companies see the loss of planning possibility as a serious setback for investments and production plans. All the more so since the factors which create uncertainty have already multiplied over the last twelve months (keywords: immigration regime, future of the bilateral agreements with the EU and tax policy).

At this point in time however it remains difficult to gauge the extent of a possible slow-down in economic activity due to the recent appreciation of the Swiss franc. How much of an impact the appreciation in the value of the Swiss franc will have on GDP growth and on the labour market will depend first of all on the extent and duration of the appreciation and secondly on the interplay with many other factors. A period of increased uncertainty could therefore further exacerbate the negative effects. Conversely, a growing global economy, in particular a strengthening of the economic recovery in Europe, could provide support for the Swiss export industry and alleviate, to some extent, the impact of the appreciation. It follows from this that for a comprehensive economic assessment and an update of the forecasts, the exchange rate situation should not be viewed in isolation but instead considered within the overall picture together with other factors.

There is currently still considerable uncertainty as to where exchange rates will settle over the coming weeks and months. The Swiss economy performed well by international comparison with a Euro exchange rate of about 1.20 CHF/EUR during the last three years. If the Euro exchange rate were to move back towards this level or just below it, the negative effects on growth could remain relatively limited (in the sense of a temporary economic dip). However, if the franc were to fall below the parity of 1 CHF/EUR for an extended period (several months) and to persist at the current high level against other currencies such as the US dollar, this would be a significant currency shock. Such a strong and broad rise in the value of the Swiss franc (against a number of currencies) would in all probability lead to falling exports and subsequently a weakening of the domestic economy and a rise in unemployment. One of the anticipated consequences of this would be a sharp slowdown in GDP growth, for this and next year at least; at most, just still in positive territory, even a fall in GDP would be conceivable in this scenario.
The revised economic forecasts published by various institutes over the last few days show a very disparate picture. There is consequently an extremely wide variation in forecasts for GDP growth in the current year, ranging between -0.5% to just +1%. These significant differences in the forecasts are a clear indication of the considerable uncertainty which prevails currently in issuing forecasts.

The Federal Government’s Expert Group will continue to closely monitor developments in the financial markets and in the real economy over the weeks ahead and will publish a comprehensive assessment of the economic situation and new forecasts for 2015 and 2016 on 19 March 2015.

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Address for enquiries

Eric Scheidegger, SECO, Head of the Economic Policy Directorate, Tel. +41 58 462 29 59
Bruno Parnisari, SECO, Head of Short-Term Economic Analysis, Economic Policy Directorate, Tel. +41 58 463 16 81

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Publisher

State Secretariat for Economic Affairs
http://www.seco.admin.ch