Swiss industry braces for strong franc battering

Dark clouds hang over the machine industry Lamineries Matthey SA

Despite the removal of the franc-euro exchange rate peg by the Swiss National Bank (SNB) in January, job cuts have been minimised. However, layoffs could intensify toward the end of the year as a strong currency really begins to hurt competitiveness.  

The past six months have been tough for Rolf Muster. “The machine-tool industry is used to weathering cyclical crises, but the situation is really serious today,” says the head of Schaublin Machines SAExternal link, a business in canton Jura specialising in the construction of high-precision machinery. “We are in a plane without a pilot and nobody seems to realise that we’re headed straight towards a wall.”

The sudden appreciation of the Swiss franc following the SNB’s decision to abolish the franc-euro exchange rate peg hit Muster’s company hard (CHF40 million/$42.6 million in turnover in 2014). Between January 1 and May 31 this year, orders have fallen by nearly 60%.

Muster has been forced to lay off around ten employees and impose partial employmentExternal link on 35 more. If the franc continues to remain on par with the euro, he will be forced to part with nearly half of his 120 employees. “During the 2009-2010 crisis, we knew that the global economy would one day or another rebound,” he says. “Today, the lack of visibility is particularly troubling, as it appears less likely that the Swiss franc will rapidly lose value compared to the euro.”

Innovate, but how?

Muster’s anger is directed at the SNB, but also at Economics Minister Johann Schneider-Ammann, whom he deems far too passive in this crisis. He no longer pays attention to politicians’ calls to boost innovation to further improve the competitiveness of “Swiss made” products.

“We already invest close to 10% of our revenue in research and development. How can we increase this further when our revenue is halved?” complains Muster. “The Germans, who are our main competitors, have become 15% cheaper overnight without having changed a single bolt in their machines.”

The entrepreneur’s anxieties are also shared by SwissmemExternal link, the umbrella association of the mechanical, electronics and metallurgical industry (MEM) that accounts for 380,000 jobs in Switzerland.

“Most companies in the industry are strongly affected by the SNB’s decision,” says Swissmem’s Philipe Cordonier, who is responsible for French-speaking Switzerland.

So far, the shock of the strong franc (the second sustained since 2011) could be buffered thanks to cost-cutting measures made prior to January 15. Three months after the removal of the franc-euro peg, “only” 2,000 jobs had been lost in the MEM industry, which exports 80% of its production (60% goes the EU). The economy is still predicted to grow despite a downward adjustment of the growth rate.

30,000 jobs by the wayside

But when it comes to negotiating with clients, heads of small and medium enterprises (SMEs) show little optimism. “The second part of the year will be difficult,” says Cordonier. “If the predicted loss of contracts materialise, we might rapidly see a wave of layoffs,”

Valentin Vogt, president of the Swiss Employers’ Association recently expressed his concern in the pages of the German-language daily NZZ am Sonntag, stating that almost 30,000 jobs could be lost in six to nine months if a euro exchange rate of around 1.05 francs persists.

Pierluigi Fedele, a board member of the union UNIAExternal link, thinks these are realistic estimates: “Jobs are lost every day in the industry but for now these are primarily fixed-term contracts that are not renewed or retirees who are not replaced,” he says. “But many SME heads, particularly in the Jura, foresee having to make more and more brutal decisions.”

Watchmaking industry uncertain

If the MEM industry is the most affected by the strong franc, the slump could rapidly extend to other sectors. Representatives of the chemical, pharmaceutical and food industries – sectors known to weather adversity well – have also shared their concerns in the Swiss press.

Even the Swiss watchmaking industry, which has seen comfortable profit margins in recent years by taking advantage of the “Swiss made” consumer effect, has also begun to feel the burden of the monetary upheaval.

Some of those concerned, like Antonio Rubino, secretary general of the Swiss mechanics industry groupExternal link, still refuse to paint too bleak a picture. “Nearly 40% of businesses affiliated with our organisation have been strongly affected by the SNB’s decision,” he says. “In contrast, 40% who import their components from the euro zone have profited, whereas 20% have not seen any change.”

Thus for Rubino, there is no reason to panic.

“The abolition of the exchange rate peg was a shockwave, and the coming years will be challenging for Swiss industry,” he says. ”But it is also an opportunity for many business leaders to consider abandoning activities that only bring little or medium added value but I do not believe there is a threat of massive deindustrialisation.”

SNB acts

The Swiss National Bank (SNB) has recently been obliged to intervene in the foreign exchange markets to prevent a further upswing of the franc against the euro. SNB chairman Thomas Jordan revealed this intervention on June 29. It was the first officially declared intervention since the SNB dropped its CHF1.20 exchange rate cap against the euro in January. Jordan would not divulge details of the intervention nor would he say whether the SNB would buy up euros in future.

 

The inability of Greece to reach agreement with its creditors will most likely enhance a flight to the franc as a safe haven currency, according to experts. Many observers therefore believe the SNB will be forced into further action.

 

However, the markets also know that the SNB does not have an unlimited capacity to intervene, UBS chief economist Andreas Höfert said ina recent interview with the La Liberté newspaper. Another tool available for the SNB to fight the appreciation of the franc would be to plunge interest rates into deeper negative territory, said Hall. The reference interest rate in Switzerland currently stands at -0.75%.

Downward predictions

The appreciation of the franc should not lead the Swiss economy into a deep recession, assuming that domestic demand is robust and that the world economy recovers, as indicated in mid-June by the State Secretariat for Economic Affairs (SECO). SECO nevertheless spoke of a “painful adjustment” to the appreciation of the franc, and forecast a slight decrease in growth (+0,8% of GDP in 2015).

For comparison, the SNB predicts growth of less than 1% this year. UBS and Credit Suisse are aiming for respective increases of 0.5% and 0.8%. The Institute for Economic Research (KOF) at the Swiss Federal Institute of Technology in Zurich is more pessimistic, with a forecast of 0.4% growth preceded by a brief recession.

source: Swiss News Agency

Translated from French by Celia Luterbacher