Franc Rise Fuels Unemployment and Recession on Switzerland

When the Swiss National Bank tied the Swiss franc to the euro 3½ years ago, it feared a surging franc would tip the economy into recession. With the SNB now having lifted the cap, the economy is back to square one: a stronger franc once again threatens to snuff out growth in one of Europe’s few bright spots.

Switzerland’s export sector, which accounts for about 70% of gross domestic product, is most at risk. Swiss goods could be priced out of the eurozone, the country’s biggest market, threatening both Swiss corporate profits and jobs. The market shifts to Germany where the Euro brings the buyers in.

Zurich-based private bank Julius Baer Group AG said on Monday that it would cut about 200 jobs to “mitigate” the effects of the strong franc, in the first response among Switzerland’s outsize banking industry. Like other Swiss private banks, Julius Baer reports most of its costs in francs, but derives most of its income in euros or dollars.

The country’s two leading economic research institutes – KOF and BAK Basel – now predict that the economy will enter a recession before the end of this year. “The first sector likely to be hit by the shock rise in the franc will be exports, which could drop by around 1.3% this year,” said BAK Basel economist Alexis Bill-Körber.

Switzerland’s three largest banks still expect the economy to avoid a recession, commonly defined as two consecutive quarters of declines in gross domestic product. But they have cut their forecasts to an anemic growth rate of between 0.5% and 0.8% this year, and around 1.2% next year. That compares with expected growth of 1.4% in 2014.

Neither the SNB or the government has issued new economic forecasts since the central bank’s surprising decision to lift the cap on Jan. 15, which sent the franc rocketing against the euro and roiled global markets. The bank defended its decision, saying the upturn in the U.S. economy had boosted the dollar against the euro and the franc, making the franc’s cap untenable.

The franc on Monday traded at 1.0502 against the euro, compared with around 1.2008 the day the cap was lifted.

The Swiss unemployment rate of 3.4%, remains low by European standards; the eurozone jobless rate hit 11.4% in December. But economists expect Swiss companies to push the country’s unemployment rate higher in coming months. Swiss industrial lobby group Swissmem has warned that the strong franc could put around 20% of its members out of business.

In addition to banks, retailers are likely to be hard hit by the stronger franc. That is particularly true for those near Switzerland’s border with Germany, France and Italy, a relatively short drive away for shoppers seeking to take advantage of the stronger franc.

Swiss retailer Migros Group expects sales to decline at its stores along the border, according to comments made to Swiss media by Chief Executive Herbert Bolliger. The difference in staff costs between Migros and its German competitors is “enormous,” Mr. Bolliger said, adding that a Migros cashier in Switzerland earns around 4,000 francs (€3,800) a month compared with the €1,600 a month made by a cashier in Germany.