Record inflation, geopolitical conflicts, global trade slowdown and repeated incarceration… The global economy in 2022 will face multiple challenges that also affect Switzerland. Three risks are now discussed: the risk of recession, high inflation and a strong evolution of the currency. decryption.
Arthur Jurus – Senior Strategist at ODDO BHF
Could the Swiss economy end up in a recession? This scenario is unlikely at this point.
Despite the negative impact of the crisis in Ukraine, Swiss economic activity will remain robust. This saw a strong recovery in 2021 with a growth rate of 3.7% and an employment rate above pre-crisis levels.
The crisis in Ukraine has somewhat brought these dynamics to a halt through several channels: (I) the rise in energy and commodity prices that supports the rise in inflation and thereby reduces the real purchasing power of households, (II) disruptions in the supply chain that an impact on the price of business inputs, and (III) the decline in global growth, particularly in Europe, hurting the Swiss export sector.
On the latter point, the risk of a recession (two consecutive quarters of slowing growth) is high in Germany, especially due to the strengthening of the implementation of a European embargo on Russian oil. In addition, with 17% of exports, Germany is Switzerland’s second largest trading partner.
Nevertheless, previous crises have shown how resilient the Swiss economy is compared to its European partners. During the financial crisis of 2007-2008, economic activity in Switzerland shrank by half (-2.2% against -4.5% for the eurozone) and the economy recovered more quickly (2.8% in 2010 against 2.1 % in the euro area) . In addition, current forecasts in Switzerland are more optimistic. The SNB (Swiss National Bank) has certainly lowered its growth forecast for 2022 from 3% to 2.5%, but this level remains higher than the IMF’s long-term potential growth of 1.5%.
Can Swiss inflation reach 10%? Although consumer and producer price indices reached record highs in March, Swiss inflation will remain subdued.
For us consumers, the price increase in March was 2.4%. Half of this is explained by the escalation in the price of hydrocarbons, the increase of which is more than 20% over a year. For companies, producer prices rose by 4.1%. A dynamic that is again explained by petroleum products (74%) and metals (15%).
These price increases must be qualified for two reasons. First, Swiss inflation is three times lower than inflation in the eurozone (7.5%) and in the United States (8.5%). Second, Switzerland will return to inflation below the 2% target from 2023, with inflation at 0.9% according to SNB and consensus forecasts.
So how can the Swiss economy’s resistance to inflationary pressures be explained? Mainly due to the strength of the CHF (valuation of 7% against the EUR since the beginning of 2021) limiting the increase in the prices of imported goods (5.5%). Finally, Switzerland’s energy efficiency explains the lower impact of the increase in oil prices on inflation: final energy consumption in relation to GDP is thus two times lower than in Germany.
Can Swiss Franc Appreciation Continue? Yes, a EUR/CHF below parity cannot be excluded.
Indeed, the real exchange rate of CHF points to a potential depreciation of the EUR/CHF of almost 20%. This is due to three factors.
First, producer prices in Switzerland have been stable since 1995, while in the United States they have increased by +82% and in Germany by +69%.
Second, this trend is accelerated by the inflation differential between the eurozone (7.5%) and Switzerland (2.4%).
Finally, the interventions of the Swiss National Bank on the foreign exchange market (CHF 14 billion injected since the beginning of March) testify to a persistent demand for the Swiss currency, whose appeal has only increased over the years.
Over the past year, the CHF has risen by 6% against the EUR. The Swiss Appaloosa is (again) back and is again gaining ground against the single currency.
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