The Swiss economy is going through turbulent times. Also, the reduced 15% US’s tariff rate poses considerable challenges, especially for small and medium-sized enterprises that generate a high share of the value added of their US exports in Switzerland. However, the manufacturing sector has not only faced difficult conditions since the beginning of August, when high US tariffs were imposed. What is proving even more challenging is that the crucial transmission belt to the world for many Swiss suppliers—the core European industry, especially in Germany—has barely moved for several years. Although leading indicators point to a tentative recovery in European industrial activity, overall it is likely to remain below average and thus provide little impetus for the Swiss industrial sector.
As a result, it is mainly domestic demand, especially private consumption, that is currently keeping the Swiss economy afloat. Solid employment and real wage growth have been an important support for private consumption demand over the past two years. Our recently published wage survey on the results of this autumn’s wage settlements shows that nominal wage growth will likely be around one percent, somewhat lower than in previous years. Given that inflation has now fallen to almost zero, this is not surprising and, despite modest nominal wage increases, should result in a slight real increase in purchasing power for consumers on average.
Because inflation in Switzerland quickly subsided after the surge in 2022/2023 and is now just above zero percent—almost too low—the Swiss National Bank (SNB) was able to swiftly lower its policy rate to zero from the beginning of last year. However, SNB President Martin Schlegel has repeatedly emphasized that the hurdles for another rate cut into negative territory are relatively high. The SNB will therefore likely try to avoid negative rates. Whether this will become necessary depends, among other things, on whether the global—and thus the Swiss—economy can avoid a recession in the coming quarters.
In this context, the franc must not appreciate suddenly and sharply, especially against the euro. The euro is particularly important for a significant portion of Swiss suppliers to the already struggling European industrial sector. The purchasing power parity—that is, the exchange rate we would consider “fair”—for EURCHF is around 0.96, which is higher than the current spot rate. Further strengthening of the franc would therefore soon prompt the SNB to act, in our view, potentially through foreign exchange market interventions and, if necessary, further rate cuts to counteract an excessively drastic decline in the euro exchange rate.
For the USDCHF currency pair, purchasing power parity according to our calculations is around 0.77, which is lower than the current spot rate. Given the expected slowdown in the US economy and further rate cuts by the Federal Reserve, we also anticipate a further reduction in the interest rate differential between the franc and the greenback. This should cause the US dollar to trend toward 0.76 over the coming months. We believe hedging USD long positions becomes attractive above 0.81, and selling CHF upside potential can improve returns in a low-volatility environment.
