Switzerland’s economic outlook has deteriorated sharply since the Swiss National Bank abandoned the euro-franc exchange rate floor, which led to a substantial revaluation of the franc. A recession cannot be ruled out.

The SNB’s abolition of the EURCHF floor of 1.20 is likely to leave clear signs of a slowdown in the Swiss economy. Due to the revaluation of the franc, we have lowered our 2015 GDP growth forecast to 0.5% from 1.8%. A period of negative growth over two consecutive quarters can- not be ruled out. Technically, this is defined as a recession. For 2016, we now expect growth of 1.1% instead of 1.7%.

Export sector most under pressure. After the exchange-rate floor was abandoned, the Swiss franc rose at a stroke by about 17%. We do not expect the franc to weaken significantly in 2015; in fact, we expect the strong franc to deal a hard blow to the Swiss export industry. The biggest negative impact is likely to occur in exports to the Eurozone, which receives about 60% of Swiss exports. We estimate this trade to fall by about CHF 5bn in 2015 due to the strong franc. Exports to countries outside the Eurozone are likely to fall less sharply, as the franc had already weakened significantly against many currencies in the six months before the SNB decision. The bottom line is that we expect Swiss exports to decline by 1% in 2015.

Domestic economy not immune to the strong franc. The negative impact of the franc’s revaluation will not leave the domestic economy unscathed. Some companies might relocate parts of their production abroad and cut jobs in Switzerland, while some could disappear completely. This will affect not only the highly export-oriented companies; even companies with a domestic orientation will suffer under increased margin pressure as a result of competition from falling import prices. This will affect suppliers to the export sector in particular, as they account for about 40% of the gross value-added in Switzerland’s export goods.

The slowdown in economic growth due to the franc’s revaluation is likely to raise the unemployment rate from the current 3.2% to an average of 3.6% in 3.5% in 2016. The currency revaluation and the decline in oil prices are each likely to put downward pressure of 0.3 percentage point on consumer price inflation in 2015.