Weekly Update - Switzerland: managing the Swiss franc remains key to containing inflation
Switzerland stands out from its European neighbours for the resilience of its economic activity and the particularly contained rise in inflation. The Swiss National Bank will continue to act to ensure that the strength of the Swiss franc limits the pressure on prices.
An economy that is particularly resilient in the face of shocks, but which should slow by the end of the year. Swiss economic activity has proved particularly resilient following the shocks of Covid and the war in Ukraine. Indeed, growth has been robust so far this year, with a resilient industrial sector and a favourably oriented services sector. The labour market is proving particularly robust: the unemployment rate has continued to fall to 2%, its lowest level since 2002. Business activity is expected to moderate. Leading indicators (KOF or PMI surveys) have been pointing to a marked weakening in momentum since the second quarter, and this trend is set to continue in the second half of the year. There are several reasons for this expected slowdown: (i) the expected slowdown in activity in our trading partners in the second half of the year, (ii) the rise in prices, which is weighing on purchasing power, and (iii) the tightening of monetary conditions, which is dampening demand.
Inflation has risen much less than elsewhere and is expected to fall. Inflation rose later and much more moderately than in other developed economies. It seems to have peaked at 3.4% in February, before falling back to 2.2% in May. Core inflation - which only temporarily exceeded 2% - fell back to 1.9% in May. Switzerland thus stands out for its much more contained inflation. Looking ahead, the buoyant labour market and pressure on rents could continue to push up prices, but inflation should still fall thanks to the easing in global commodity prices.
The Swiss National Bank (SNB) will remain vigilant on inflation and will continue to use its currency channel. The Swiss franc has been appreciating against the major currencies for several years, both because of Switzerland's large trade surpluses and because the currency is seen as a hedge against risks. This downward trend has led to strong downward pressure on prices in Switzerland, contributing to a situation of near-deflation for many years prior to the Covid. In response, the SNB intervened regularly to try and limit the appreciation of its currency. Post-Covid, on the other hand, the continued appreciation of the Swiss franc has been a real asset for Switzerland, helping to limit the import of inflationary pressures seen everywhere else. Faced with this change in context, the SNB tended to let its currency appreciate (by selling currencies) and even raised its key rates to accompany the movement (from -0.75 to +1.75 in one year). In future, given the visible easing in inflation, the monetary institution is likely to raise its rate at least once more before maintaining the status quo and witt pursuit it international reserves sales. It will also remain vigilant to ensure that the strength of the Swiss franc continues to curb imported inflation.
Finally, in the main events of the week, we have chosen to talk about inflation in the Euro area and to focus on monthly US household balance sheets.