Weak exports and business prospects

A big part of the problem is sluggish economic data continues to emerge from Switzerland, with weak exports the primary culprit. About 60 percent of total Swiss exports head for Europe, with roughly 20 percent going to Germany.

“The Swiss economy is very export driven,” says Henrik Gullberg, an analyst at 4cast Inc. “The poor economic development in the Euro zone economy, and in particular Germany, is holding Switzerland back.”

With 2005 gross domestic product (GDP) forecasts for the Euro zone limping around the 1.6 percent area (down from earlier estimates of a 1.9 percent growth) the outlook continues to deteriorate for the Swiss export market.

“Switzerland has suffered from particularly dismal economic performance in recent months,” adds Melanie Averall, associate economist at Economy.com. “The Swiss economy contracted 0.1 percent in the fourth quarter of 2004, down from a modest 0.4 percent expansion in the previous quarter.”

Averall points to weak business investment as another factor, which will likely keep the Swiss economy in a downward trajectory in the months ahead. Swiss GDP growth forecasts for 2005 are in the 1.4 to 1.5 percent range. Analysts say an upturn in the economy is dependent on recovery and faster growth in the Euro zone as a whole. The widely watched KOF, released by the Swiss institute for Business Cycle Research, is the leading Swiss economic indicator for business expectations and sentiment.

“This key gauge of the Swiss economy has lost roughly half of its value since mid 2004 and is well off the three and-a-half year high recorded in July last year,” Averall notes. “The latest reading stands at 0.44 as of March, down from the 2004 high at 0.94.”

Sean Callow, currency strategist at Ideaglobal, says the economic weakness “means we are a bit light on reasons for buying the Swiss franc.”

Nonetheless, Callow notes, “They do have a large trade surplus, which is an underlying positive. But the franc is not likely to attract many investment flows. Their interest rates are so low and will stay low.”