Swiss Acclimatize to New World After Losing Franc Shelter

by Corinne GretlerCatherine Bosley

(Bloomberg) -- For family-owned watchmaker H. Moser & Cie., whose timepieces are produced by hand, the Swiss franc’s 20 percent surge to near parity with the euro means business will have to adapt.
Acclimatizing to an uncertain new world after the central bank unexpectedly dropped its currency cap of 1.20, Chief Executive Officer Edouard Meylan is looking at options including partnerships for the production of parts and cutting some spending as he tries to protect sales and profits.
The Swiss National Bank’s Jan. 15 decision delivered a shock to the export-oriented economy, which has outperformed the neighboring euro area every quarter since 2012. While the immediate market turmoil has faded, companies are still coming to terms with the stronger currency and a radically changed outlook, with forecasts ranging from a slowdown in growth to outright recession.

“We’re planning on a 1.05 exchange rate in the
near future -- but we don’t know where it will stabilize,” Meylan said in an interview from the company’s headquarters in Neuhausen am Rheinfall, some 50 kilometers (31 miles) north of Zurich. “We’re exploring producing certain non-strategic parts and components with high-quality partners in Germany or France.”
The franc’s rise will primarily hit manufacturing and tourism. While manufacturing, much of which involves the production of technically sophisticated machines, accounts for about 19 percent of economic output, tourism contributes less than 3 percent. Even so, foreign visitors are an important source of revenue for Alpine towns like Zermatt and St. Moritz.

Unofficial Corridor

The currency fell to the lowest since Jan. 15 on Monday after Schweiz am Sonntag newspaper reported that the SNB has an unofficial corridor of 1.05 to 1.10 francs per euro. On Tuesday, the franc stood at 1.0524 per euro at 8:18 a.m. in Zurich.
The central bank, which declined to comment on the report, hasn’t updated its forecast for 2015 growth of 2 percent since the cap was abandoned. Policy makers have, however, said they expect the pace of expansion to cool.
Among economists and investors, there’s disagreement as to whether there will be a contraction and if so, how deep.
“If the franc dips back toward 1.05 or 1.10, we’ll see a slowdown of growth, but maybe not a recession,” said Janwillem Acket, chief economist at Julius Baer Group AG in Zurich. “If we’re at parity with a 20 percent appreciation, a contraction is likely.”

Recession Risks

Larry Fink, co-founder and CEO of BlackRock Inc., the world’s largest money manager, predicts a recession. So does the Zurich-based KOF economic institute, which has said there may be a “short” one this summer. According to the BakBasel economic research consultancy, a franc at parity with the euro means a 0.2 percent economic contraction this year.
At 4-in-10, the odds of Switzerland slipping into recession are greater than those for Greece, a Bloomberg survey of economists found.
Still, not all are so dour, with Credit Suisse Group AG and UniCredit SpA foreseeing only a slowdown. Even with a currency widely viewed as overvalued and neighboring countries embroiled in a sovereign debt crisis, Switzerland has previously shown a resilience and has avoided recession -- which economists define as two consecutive quarters of contraction -- since the post-Lehman Brothers Holdings Inc. economic plunge of 2008 and early 2009.

‘Extremely Flat’

According to Maxime Botteron and his colleagues at Credit Suisse, a 10 percent franc gain franc lowers the growth rate by 0.3 percentage point. While this means a recession should be avoided, the “forecasted growth profile is extremely flat,” they said.
Swiss companies are split on the franc outlook, according to a Credit Suisse survey published Monday, which showed that 52 percent of purchase managers expect it to stay at parity to the euro for at least a year.
H. Moser isn’t the only company responding to the stronger currency. Last week, drugmaker Roche Holding AG said the currency’s surge may erode profit growth this year and competitor Novartis AG said it will seek to cut costs in Switzerland. Givaudan SA, the world’s largest fragrances maker, said the franc will weigh on growth, while dental implant-maker Straumann Holding AG limited bonus payments and cut its CEO’s compensation.
Lobby group Swissmem has urged the central bank to take up interventions again to weaken the franc, and companies have begun to consider compensatory measures, such as extending working hours or paying workers who live in neighboring France or Italy in euros instead of francs to reduce costs.

Immigration Quotas

Adding to the downside risks to growth are plans to limit immigration, which has been a chief support of domestic demand. The Swiss voted a year ago to impose a quota system for newly arriving immigrants from the European Union, who currently enjoy free entry. The government has yet to announce how tight those new restrictions will be, which will also contravene a treaty with the EU, potentially causing a deterioration in trade relations.
As for watchmaker Moser, started in the early 19th century by a Swiss emigre in Russia, the prices of its watches have jumped to 15,000 euros ($17,000) from 12,000 euros practically overnight and customers have grown hesitant, according to CEO Meylan.
“People are risk-averse -- they don’t order, and instead they wait,” he said. “We will have a few difficult months ahead of us.”