Business is good this summer for the operator of cable cars that take tourists to near the summit of the 3,000 metre Titlis mountain in the Swiss Alps, where a shop sells luxury watches to Asian and other tourists.
“We reached quite a high [revenue] level in 2017 — maybe this year is even better,” said Peter Reinle, marketing director at Titlis Bergbahnen.
Like the cable cars on Titlis, the Swiss economy is again reaching the heights. Since a severe foreign exchange shock in 2015, which saw exports wilt as the franc soared against the euro, Swiss industries have staged an impressive recovery, buoyed by a global economic upturn — with tourism boosted by rising visitor numbers, particularly from China.
“The weather is favourable, the Swiss franc is a bit less strong and the economic situation in Europe is better — people can afford Switzerland again,” said Maurice Rapin, head of tourism at the Swiss cable car association.
The Swiss National Bank (SNB) is cautiously projecting that the economy will expand by 2% this year, which would be the fastest since 2014. Seasonally adjusted unemployment, at 2.6%, is the lowest for a decade.
But the risk of an Alpine drop is never far away. Even as businesses enjoy the good times, they are haunted by the fear that global trade conflicts and geopolitical tensions will reinforce Switzerland’s haven status — and ruin their recovery.
Being one of the world’s strongest and safest economies is a mixed blessing for Switzerland. When international investors get nervous, the Swiss franc is a desirable safe asset. But as capital floods into the currency and its value rises, exporters suffer, and tourist businesses lose competitiveness.
“The ‘haven’ effect is something that is latent — it could erupt at any time,” warned Stefan Gerlach, chief economist at EFG Bank in Zurich.
It is perhaps no coincidence that Titlis’s share price has fallen in recent weeks. “We just don’t know what will happen,” said Mr Reinle.
The 2015 “Frankenschock” erupted when the SNB gave up trying to fight markets and cap the value of the franc against the euro. In a bid to limit the currency’s subsequent rise, it slashed its main policy interest rate to minus 0.75%, one of the lowest official interest rates in the world. Despite the improving economy, it has left the rate there ever since.
The inaction by the SNB betrays official fears that a sudden surge in global tensions could again spark haven-seeking capital inflows.
It also underlines the difficulties caused by Switzerland’s close relationship with the surrounding eurozone. Analysts believe the SNB will not raise interest rates before the European Central Bank — otherwise the difference between eurozone and Swiss borrowing costs would narrow, and the franc’s attractiveness would rise.
“If you were parachuted in from Mars, you would think the economy looked very strong, everything would be understandable — except when you saw where the central bank had interest rates,” said Mr Gerlach.
Swollen balance sheet
The result is that the SNB would have to consider even more radical steps if crisis conditions returned. Already its balance sheet has swollen to more than CHF830 billion ($835 billion) as a result of its currency market interventions.
During the early years of this decade, the franc rose on worries about the eurozone. Those concerns could once again surge if Italy’s populist politicians, now in government, were to raise questions over the euro’s stability. A disorderly Brexit which hit continental Europe would be another threat.
After falling in April to its lowest level against the euro since the Frankenschock, the franc has crept ominously higher more recently.
This week, the KOF economic institute at Zurich’s ETH Federal Institute of Technology, reported that its Swiss “economic barometer”, meant to indicate short term trends, fell in July. Since May it has bounced around levels last seen two years ago.
Global trade tensions
The gauge “confirms there is nervousness about the future — about global trade tensions and haven inflows”, said Nadia Gharbi, economist at Pictet in Geneva.
The direct effects of global trade tensions might be limited. Switzerland is strong in categories such as pharmaceutics, chemicals, engineering products, watches and financial services — not categories affected so far.
But Switzerland would be affected indirectly by a slowdown in other continental European economies, particularly Germany’s. More crucially, the franc could rise if trade tensions turned global investor sentiment.
“Those indirect effects are much more important for Switzerland,” said Alessandro Bee, economist at UBS.
If that happens, Swiss cable car operators will be ready. Mr Rapin at the trade association said: “Maybe it sounds funny, but they are used to difficult times.”
Copyright The Financial Times Limited 2018
The Financial Times