Switzerland

Switzerland: is too good eventually bad?

The Swiss economy and the Swiss franc have been a safe haven in the Eurozone since the beginning of the financial crisis in 2009. The EPI grades Switzerland’s economic performance at an A level since 2010, with the EPI score projected to be 97.3%, or an A level, in 2016.

The inflation rate has been close to zero in the past few years, GDP growth has been small but positive, unemployment levels were around 3%, and the government has been running budget surpluses. Because of these strong economic fundamentals, the economy experienced large capital inflows and the Swiss National Bank (SNB) decided to fix the rate of the Swiss franc to Euro at 1.2 in 2011.

The Swiss franc appreciation has been the main shock to the economy. The SNB exited from the floor on January 15, 2015 and the frank appreciated almost 20% within a day. The floor of 1.2 francs per euro, which had been in place since 2011, faced little pressure for most of 2013-14. However, in late 2014 the SNB started intervening heavily to defend the floor in response to increased capital inflows arising from a combination of events, including the anticipation of the European Central Bank’s quantitative easing program and geopolitical turmoil in Europe. To maintain the fixed rate of the Swiss franc, the SNB was buying Euros and selling francs on the market in large quantities. When the SNB’s balance sheet was approaching 90% of GDP, the SNB decided to exit the currency peg to avoid speculative risks of over-appreciation and further speculative pressures.

Following the appreciation, growth indicators have weakened, as Swiss goods became less competitive and inflation has fallen deeper into negative territory. The appreciated franc will weigh on growth in 2016, but the economy is expected to recover over the next few years. The 5-Minute Economist projects Switzerland’s EPI score to stay at the similar levels of about 97%, or an A level, in the next few years.