Swiss Economy Feeling the Chill of Germany‘s Slowdown

Switzerland’s economy is facing a growing chill from its large neighbor. Swiss National Bank President Martin Schlegel warned that economic weakness in Germany is rippling across the border, impacting Swiss industries.

“When Germany has a cold, Switzerland gets the flu,” Schlegel stated during a Bundesbank event in Frankfurt on Saturday. “We are definitely feeling this weakness in the German industry. In other words, there is significantly less demand for Swiss industry.”

A Strong Franc Adds to the Pressure

Schlegel’s remarks come as Switzerland grapples with slowing growth, largely attributed to the robust Swiss franc against international currencies. The strong franc makes Swiss exports more expensive, especially impacting industrial sectors heavily reliant on foreign sales. This issue has come into sharp focus recently as Swiss Steel Group announced plans to cut hundreds of jobs due to dwindling foreign demand, specifically from the struggling German automotive industry.

Interest Rates on Hold, For Now

Germany’s economic woes present a significant challenge for the Swiss National Bank (SNB). The central bank has persistently eased rates throughout this year, aiming to stimulate the economy. However, the strong franc complicates their efforts, as further interest rate cuts could weaken the currency even more, potentially exacerbating inflationary pressures.

The SNB faces a delicate balancing act. While battling sluggish growth, it also needs to keep inflation in check. Consumer prices have been consistently below the SNB’s projections, weighing on the central bank’s decision-making process. Inflation data due next Tuesday is expected to show a slight acceleration but will likely remain below previous forecasts for the fourth quarter.

Negative Rates Remain on the Table

Looking ahead to its December 12 interest rate decision, the SNB appears poised for another rate cut from the current 1%. Schlegel’s unusually candid statement that further easing is “likely” suggests a continued dovish stance from the central bank. Typically, the SNB avoids forward guidance on interest rate policy.

Schlegel explicitly stated that should a crisis emerge, the SNB would lower interest rates and take precautions to prevent the franc from appreciating further. He also reiterated that the bank remains prepared to push borrowing costs below zero if necessary to maintain price stability. Switzerland spent almost eight years with negative rates until 2022.