Swiss’ unruffled approach to combat the virus
As most economies, Switzerland has been battered by the coronavirus pandemic. By mid-March, Swiss policymakers announced a national emergency for more than a month, asking all schools, kindergartens, shops, restaurants, cafés and public entertainment places to halt activity until April 19, and possibly longer.
Besides the public lockdown, many factories slowed or ceased their production lines to contain the virus contagion, but also for some employees being tested positive for coronavirus and many simply refusing to work for health or personal purposes.
Life in Switzerland slowed to an unprecedented extent as most nations on the globe. The economic activity became alarmingly anemic, although Switzerland didn’t order a strict confinement of the population allowing a minimum flexibility for its households and some businesses to continue operating though at a meaningfully decelerated pace.
On the brink of economic recession.
Considering the extreme circumstances, harsh but necessary containment measures are having a severe impact on the Swiss economy. All layers of the economy ranging from households, small to medium and big sized businesses are significantly hit by the nearly full economic shutdown.
Even more so, as the e-commerce and online activities are much less developed in Switzerland compared to most countries, provided that Swiss logistics are prohibitive. The Swiss retailer giants are overwhelmed with a deluge of orders they can’t process; most shops are caught off guard faced with a sudden change in a wide ranged shopping behaviour.
In addition, Switzerland is a net importer of a large range of goods and services, hence closed borders disrupt the goods and manpower flows in and out of the country, further threatening the financial stability in the short-run provided the current international lockdown setting.
Economic projections warn that the world is on the brink of a recession that should be heavier than the ones provoked by the 2000 dot.com burst and the 2007-2008 subprime crisis.
The most recent economic data began showing weakness in hard figures already in February, with the Swiss consumer inflation falling back to the negative territory. Provided the significant slowdown in retail activity, sales and inflation should be dragged significantly lower in the coming months. We expect to see up to a double-digit slump in sales figures amid the full shutdown of non-food in-store sales nationwide.
In this respect, the preliminary PMI figures across the European economies have confirmed disquieting headwinds in activity. Services sector, which plays a major role in Western European economies, printed the sharpest declines on record.
The worst is yet to come, and Switzerland will likely see its piece of the pie shrinking as a result of a severe global economic contraction.
Keep calm and carry on.
Unlike most countries, the Swiss authorities have been rather cold headed faced with the massive economic avalanche that it is about to drown its economy to a wide extent.
Despite the brutal recession knocking on the door, the Swiss National Bank (SNB) decided to maintain the interest rates unchanged at the current -0.75% level at its March meeting. Swiss policymakers believe that further lowering rates would do no good to the economy, in contrary.
And their assessment is probably correct. Low-to-negative rates have been taking a heavy toll on the country’s financial pillars such as banks and pension funds since more than a decade. Therefore, in the case of the SNB, the cure by lower rates could be worse than the disease itself.
Comparably, the Bank of Japan and the European Central Bank, which also run on negative interest rates, followed the same reasoning but they still announced decent alternative intervention measures, including massive asset purchases to support the financial markets.
The SNB did none of it, except from insisting they would continue their direct interventions in the foreign-exchange markets to fight the franc’s undesired strength. And that, despite being put on the US watchlist of currency manipulators.
Neither the Swiss government announced a comprehensive fiscal aid package. Marie-Gabrielle Ineichen-Fleisch, director of the State Secretariat for Economic Affairs (SECO) said ‘it is important that we don’t have some kind of helicopter money, subsidies or an economic programme that works only in the long term, not the short term’. Hence, the Swiss government will likely opt for targeted help to businesses and households that are heavily hit by the crisis, to help them navigate the short-term liquidity shortages to minimize avoidable insolvencies and bankruptcies, but nothing more.
SNB wins a battle, but not the war against the strong franc.
The Swiss franc, which is a traditional safe haven currency, rallied on the back of a rush to safety before the SNB announced it is not planning to deploy any additional measures to support the economy, other than the direct FX interventions.
Meanwhile, its balance sheet confirmed that the SNB has been walking the talk since the beginning of the year to tackle the safety inflows which caused an undesired appreciation in the Swiss franc.
As such, the franc’s strength has been curtailed by a credible central bank communication and worries that the lack of monetary and fiscal support would take a bigger toll on the Swiss economy than otherwise.
Hence, on the franc deck, the SNB appears to have won a battle, but not yet the war. The SNB must continuously stay on top of its game to make sure that the undesired love for its currency doesn’t hit its exports in the medium and long-term.
Swiss stocks’ limited exposure to the most hit sectors may slow hemorrhage.
The Swiss market index, SMI, slumped more than 30% during the global coronavirus sell-off, yet relatively less than its US and European counterparts as the SMI’s limited exposure to the most shattered sectors as energy and air travel provided a certain protection to the Swiss market during the heavy global headwinds.
A quick look at the composition of the SMI shows that Swiss market has no exposure to energy stocks, while basic materials have a tiny 1.8% share of the index. On the other hand, more than two-thirds of the Swiss index is made of consumer goods and healthcare sectors.
So, the fact that Nestlé, Roche and Novartis stand for more than 51% of the total market cap helped soothe tattered nerves, as these three companies should indeed announce encouraging first quarter results and better the market expectations that have been wrecked by the virus sell-off.
With only food and drug stores operating for a month, Roche and Novartis should see a limited drag to their sales. Whereas for Nestlé, the closed restaurants and coffee shops could be a true blessing, provided the sudden jump in its share of stomach. Whether the temporary peak in Nestlé’s sales could give the company a durable positive spin is yet to be seen.
Then, when we speak of Switzerland, we can’t overlook its banking sector which stands for more 21.6% of the SMI index. While the globally lower interest rates are expected to weigh on banks’ overall profitability, the Swiss banks should see a limited decline in their interest-rate related revenues, while the jump in market volatility and increased trading activity may have improved the first quarter results. Banking operations may have slowed but didn’t stop as a result of bank employees sent working from home for the first time in Switzerland’s long banking history.
We know it’s bad, we don’t know how bad.
Considering the good and the bad, the coronavirus crisis will leave marks on the Swiss economy, but as the situation is rapidly evolving at the time we are writing these lines, we do not know how deep the global and Swiss economy will dive as a result of the Covid-19 outbreak and how long the economic tragedy will last.
Swiss authorities made it clear that they won’t pull out the heavy artillery to sprinkle the economy unnecessarily. We are however confident that both the SNB and the government have got the financial strength to temper an economic slowdown, when the time is right.